Has this FTSE 100 dividend champion run out of luck?

Dividends are the bread and butter of every portfolio. But there are no dividend stocks out there that you can just buy and forget about forever. Even the market's most trusted dividend champions can be forced to cut their payout at a moment's notice if things don't go to plan, so it's always worth keeping an eye on companies to see if their dividend potential is deteriorating.

HSBC(LSE: HSBA) is one of the FTSE 100's top dividend stocks in terms of dividend yield, but in my opinion, the company is hardly what you would call a top dividend pick. The best dividend stocks are those which have scope to grow the dividend payouts, a strong balance sheet, and defensive business model. HSBC has none of these qualities.

As a bank, the company's income is highly cyclical, and management will have to cut the payout during times of economic stress to conserve capital. This means HSBC's ability to grow its dividend depends on the business cycle among other things. Then there's the bank's balance sheet to consider. Even though management is proud of HSBC's common equity tier 1 ratio 13.6% and a leverage ratio of 5.4%, the bank's multi-trillion dollar balance sheet is tough to understand, even for those on the inside, which does not fill me with confidence.

Still, over the past 12 months, shares in HSBC have rallied by more than 50% excluding dividends as sentiment towards the company has improved. A weaker pound, improving economic growth and a brighter outlook for China's economy have all been reasons behind the rally. However, after these gains, I believe it could be time to sell HSBC as there are more attractive dividend champions out there.

A better buy?

Even though shares in HSBC currently support a dividend yield of 5.9%, I don't have much confidence in this payout. City analysts believe that for the year ending 31 December, the bank will earn 48.9p per share, of which it will pay 40.3p per share to investors via dividends with cover of 1.2 times. With HSBC paying out substantially all of its earnings to shareholders in dividends, there is little room for further payout growth.

What's more, after the recent rally, shares in HSBC are currently trading at a forward P/E of 13.6, a premium multiple compared to peers such as Lloyds. Shares in Lloyds currently trade at a forward P/E of 9.3 and support a dividend yield of 5.6%, projected to rise to 6.5% next year.

Not only are shares in Lloyds more affordable than those of HSBC, but the bank is also easier to understand, having closed down all of its overseas and investment banking operations. The UK-focused bank's capital ratio is also around 13%, and with dividend payout cover of 1.8 times, there's plenty of room for further payout growth ahead.

The bottom line

So overall, considering HSBC's recent rally, the bank's premium valuation multiple and lack of for further dividend growth, I would sell this FTSE 100 dividend champion and search for income elsewhere.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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