Why I see 20% upside in this 6%-yielding large cap in 2017

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HSBC, Paris

There are few blue-chip stocks out there that offer both the potential for significant capital gains and a dividend yield almost double the market average, but HSBC(LSE: HSBA) isn't your typical large-cap. 

As one of the world's largest banks, with a broad exposure to China, HSBC has been subject to an enormous amount of negative publicity during the past five years. What's more, as investors have avoided banks since the financial crisis and have recently begun to avoid any companies with significant exposure to China, HSBC has been hit by a double whammy of negative sentiment. 

However, since the middle of 2016, it has started to attract investor interest again for several reasons. 

Attracting interest 

For a start, the fall in the value of sterling has made shares in HSBC appear more attractive compared to the group's earnings. Even though City estimates for HSBC's earnings haven't budged in dollar terms, in sterling estimates they're around 15% higher than they were this time last year. 

Secondly, it now looks as if interest rates will begin to rise around the world during the next few years. The US Federal Reserve has already fired the starting gun on rate hikes and as economic growth, as well as inflation, picks up around the world over the next year, hikes from other central banks could be on the cards. Ultimately, higher interest rates globally should lift HSBC's interest income, which should boost the bank's earnings further. 

And finally, there's the bank's 6% dividend yield. This time last year, City analysts were warning that HSBC would have to cut its lucrative dividend payout as earnings fell and the bank was required to keep more capital back in reserve by regulators. Twelve months on and the picture couldn't be more different. HSBC has proved that it can maintain the dividend payout and management has steadily increased the bank's capital buffers by reallocating capital from markets where it's not needed. The result is that HSBC's payout looks more stable than ever today. 

Yield trade 

So HSBC's 6% yield looks safe for the time being, and this could push shares in the bank higher by as much as 20% by the end of 2017. 

Renewed confidence in HSBC's outlook has already led investors to push the bank's shares from a low of 420p touched at the beginning of last year to a high 680p, and a target of 800p could be on the cards if yield investors continue to flock to the shares. Indeed, even though interest rates might begin to rise over the next 12 months, HSBC's 6% dividend yield will remain attractive to saves for some time, and I estimate the yield will have to drop below 5% before income investors start looking somewhere else. 

With a payout of 40p per share slated for 2017, shares in HSBC could hit 800p before buyers start to fall away, nearly 20% above current levels. 

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Rupert Hargreaves has no position in any shares mentioned. 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.