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Since October, the HSBC This share price of HSBA (LSE:HSBA) is up 40%. Given a solid set of full year results, the bank can be set to pay a special dividend, which is sure to entice shareholders looking for a second income.
A special treat
HSBC’s latest financial report on earnings is 31/12/2019. The number impressed overall as most of the figures were above analyst consensus. Consequently, the stock has performed relatively well since the release of the report, with investors excited about the prospect of a special dividend.
| Metric | 2022 | 2021 | Growth |
|---|---|---|---|
| Net interest income (NII) | $32.61 billion | $26.49 billion | 23% |
| Net interest margin (NIM) | 1.48% | 1.20% | 0.28% |
| Impairment charges | $3.59 billion | – $0.93 billion | 486% |
| net profit | $14.82 billion | $12.61 billion | 18% |
| Return on tangible equity (ROE) | 9.9% | 8.3% | 1.6% |
The good numbers are the result of high net interest income (NII) and strong international growth. At that time, HSBC elected to pay a final dividend of $0.23 per share, bringing the full year’s dividend to $0.32 per share. But what attracts investors the most is the prospect of a special dividend.
The lender is considering paying a special dividend of $0.21 per share from the proceeds of the sale of the Canadian business. Here is HSBC’s dividend forecast, it will give shareholders a forward dividend yield of 11% in 2024, which is certainly profitable as a form of passive income.
Banking on hope
Despite the potentially rewarding payouts, investors should note that special dividends are not guaranteed. Shareholders must still vote, and HSBC must be in a financially sound enough position to return capital to shareholders.
It’s worth listening to that FTSE 100 stalwarts still have various issues to deal with, which could undermine their strong capital and liquidity positions. For one, HSBC is still defending itself in several legal cases involving film rights, mispriced securities, and anti-terrorism charges. There may be a $409m provision to cover these costs, but there is always a risk that fines could lead to even bigger costs.
Then there is the prospect of China’s volatile economic landscape. The world’s second largest economy is still wrangling with Covid and the property crisis. Both of these could impact loan growth and income for HSBC.
What is HSBC’s share price?
Taking everything into consideration, are HSBC shares worth buying for its passive income potential? Well, there’s definitely a case to be made when considering the results going forward. At 11%, it definitely gets my attention. What’s more, the current and future valuation multiples look quite attractive.
| Metric | HSBC | Industry average |
|---|---|---|
| Price-to-book (P/B) ratio. | 0.8 | 0.7 |
| Price-to-Earnings (P/E) ratio. | 9.8 | 10.0 |
| Price-to-earnings ratio (FP/E). | 6.2 | 8.6 |
To complement this, the group’s current balance sheet is also relatively strong. With a CET1 ratio (which compares the bank’s capital to its assets) of 14.2%, and a liquidity ratio of 132%, it gives the stock a strong foundation to build on. So, it’s not surprising to see Barclays, Citi, and HSBC’s Shore Capital rating indicates ‘buy’, with an average price target of £7.70. This gives a rise of 25% from the current level.
However, I am still not convinced to buy the stock. While the price is attractive, there are still many things that can go wrong, especially with the long list of legal wrangles. One or two bad results can lead to huge losses, and possibly even losses. Therefore, I would not invest in Asian conglomerates right now.
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