Why I'd avoid 5.3% yielder HSBC Holdings plc and buy this income and growth stock instead
Investors who bought shares in banking giant HSBC Holdings(LSE: HSBA) at the end of 2009 for recovery and growth following the financial crisis will probably be disappointed today, eight years later.
Their original purchases would have been at just over 700p per share, so the recent share price of 705p shows that their invested capital has remained broadly flat and has lost some of its purchasing power due to the ravages of inflation.
A tortuous journey
However, the chart reveals that the journey of the share price over that eight-year period has been full of 'excitement' for shareholders, with the price dipping below 500p in December 2011, going as low as 430p in May 2016 and never breaching the 800p barrier at any time.
During the period, operating profits dipped and recovered, and the dividend payment held steady but struggled to make any real progress. Right now, the stock market is assigning HSBC a modest valuation. The forward price-to-earnings (P/E) rating for 2019 sits just below 13 and the forward dividend yield is 5.4%. But the firm deserves its low rating. City analysts following it expect earnings to rise just 5% in 2019, which follows a plunge in earnings during 2016 and a partial recovery during 2018.
To me, the business looks unstable and buffeted by the effects of cyclicality in its markets. The whole banking industry is chock full of highly cyclical companies and we never know when the next cyclical plunge will arrive for profits, dividends and the share price. As a long-term buy-and-hold investment, I see HSBC Holdings as risky right now and the big dividend on offer does nothing to soothe my concerns because I know it can disappear in a puff of smoke at any time.
A survivor set to thrive?
Instead of HSBC Holdings, I think non-standard financial products provider H&TGroup(LSE: HAT) looks far more attractive. The firm delivered decent-looking full-year results today with gross profit almost 12% higher than a year ago and diluted earnings per share up just over 48%. The directors displayed their confidence in the outlook by pushing up the total dividend for the year by just over 14%.
The quality, value and momentum indicators look attractive for this firm. The recent share price of 356p throws up a forward P/E rating just below 10 for 2019 and the forward dividend yield runs close to 3.7%. City analysts following the firm expect earnings to grow 4% during 2018 and 11% in 2019, which is an encouraging outlook on growth.
During 2017, H&T grew its revenues from the core business of pawnbroking, retail sales and personal loans. Chief executive John Nichols said: "Personal loans and our est1897.co.uk online jewellery sales are particular highlights, and there is significant scope to continue to grow these aspects of the business."
According to Mr Nichols, the marketplace underwent "significant" changes over the past four years. Competition from other players peaked, the price of gold plummeted, and new regulation caused "a number of our competitors to restructure their businesses or exit the market." Yet H&T looks like one of the survivors in the sector and I think the firm looks well placed to thrive from here.
A route to financial independence
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.