Why HSBC Holdings plc, SSE PLC And British American Tobacco plc Are So Much More Than Just Income Stocks
While SSE(LSE: SSE) is known for its excellent yield, there's much more to the company than just strong dividend prospects. Certainly, its yield of 6.2% holds huge appeal at a time when interest rates stand at just 0.5% and are unlikely to move higher at anything but a slow pace. However, SSE's defensive prospects are also a major reason to buy a slice of it.
That's because the outlook for the FTSE 100 is still decidedly uncertain, with concerns among investors ranging from a slowdown in China, the impact of further US interest rate rises and the prospects of a Brexit in around three months' time. With SSE's business model being relatively stable and highly resilient, its shares could outperform the wider index if volatility rises again to a level that was seen in the earlier part of 2016.
Evidence of SSE's defensive characteristics can be seen in the fact that it has grown its earnings on a per share basis in every one of the last five years. Furthermore, it has a beta of just 0.8, which means that for every 1% move in the wider index, SSE's shares are expected to move by just 0.8%. And with the company confirming last week that dividends will rise by at least as much as inflation in the current year, SSE has significant appeal as both an income and defensive play in the long run.
Similarly, British American Tobacco(LSE: BATS) is more than just a great income play. Clearly, its yield of 4.1% is very enticing - especially when the company's track record of rapidly rising dividends is taken into account. However, British American Tobacco also offers superb long-term growth potential, with its move into e-cigarettes providing a very positive catalyst to push its earnings and share price higher.
For example, British American Tobacco's bottom line is expected to rise by 9% this year and by a further 8% next year, which puts it on a forward price-to-earnings (P/E) ratio of just 16.4. This indicates that its shares could be due for an upward rerating and that they could continue to beat the wider index, as they've done by 66% in the last five years. Furthermore, with British American Tobacco having considerable exposure to emerging markets, it should benefit from a rising world population in the long run, with the number of smokers likely to rise in the coming years.
Meanwhile, HSBC(LSE: HSBA) continues to struggle regarding investor sentiment, with the bank's shares having fallen by 17% in the last three months and showing little sign of mounting a sustained recovery. This share price fall has contributed to HSBC now offering a yield of 8%, which for such a strong and stable business seems rather difficult to justify. In fact, HSBC is worth buying for its dividend alone, but also has excellent capital gain potential, too.
For example, HSBC is expected to increase its earnings by 9% next year and with its shares trading on a price-to-earnings-growth (PEG) ratio of just 1.1, it offers capital gain potential. Beyond next year, HSBC should benefit from rising demand for credit and other financial products in China, which means that its total return prospects are very strong. As such, it seems to be one of the most appealing buys in the FTSE 100 right now.
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Peter Stephens owns shares of British American Tobacco, HSBC Holdings, and SSE. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.