Why I’m not buying HSBC Holdings for its 5.1% dividend

HSBC dividend

Shares in HSBC Holdings (LON: HSBA) (HSBA.L) have enjoyed a strong run over the last year, rising from around 490p to 765p, a gain of more than 55%.

The banking giant reported interim results on Monday, and the market responded well to the numbers, with the stock opening around 4% higher, before falling back to close around 2% higher for the day.

Even after such a strong twelve month run, the bank is still one of the higher yielding stocks in the FTSE 100 index, with a current yield of 5.1%.

However, there’s several reasons I’m not interested in buying the bank for its dividend right now. Here’s why:

Dividend growth has stalled

The first reason I have no interest in buying HSBC right now is the bank’s lack of dividend growth. HSBC pays its dividends in US dollars, and over the last four years has paid dividends of 49 cents, 50 cents, 51 cents and 51 cents. That’s a pretty appalling compound annual growth rate (CAGR) of just 1.3%.

A statement on the bank’s website reads:

In the current uncertain environment we plan to sustain the dividend at its current level for the foreseeable future. Growing our dividend in the future depends on the overall profitability of the Group, delivering further release of less efficiently deployed capital and meeting regulatory capital requirements in a timely manner.

And looking at Monday’s interim results, nothing has changed, with no mention of a future dividend increase. Given that I’m trying to build a growing income stream, the fact that HSBC’s dividend has been frozen is not ideal.

Low coverage

Another turn-off is the bank’s lack of dividend coverage. Earnings last year were just 7 cents, giving a coverage ratio of 0.14 and with earnings estimates for this year sitting at 66 cents, that still only equates to a coverage ratio of 1.29 – which is hardly robust.

Profitability concerns

Lastly, there’s still a few key issues that could affect profitability going forward.

For example, the bank has had to spend millions splitting its investment banking arm and its retail arms to meet UK ‘ringfencing’ rules. The cost of this project so far has been a huge $500 million.

And the bank is still dealing with payment protection insurance (PPI) claims, recently setting aside another $300 million for complaints linked to the scandal.

So overall, I’m happy to pass on HSBC for now. The dividend yield may be high, but that doesn’t necessarily make the bank a good dividend investment.

Disclosure: Edward Sheldon, CFA has no position in HSBC Holdings.  

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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