If you have a small but meaningful sum to invest, it can be tricky to know where to put it, with such a wide choice of stocks out there. Still, it’s a nice problem to have and if you’re in that position, I think it’s worth considering FTSE 100 banking behemoth HSBC Holdings(LSE: HSBA).
Beast from the East
Size isn’t everything, but HSBC is the second biggest company listed in London, with a market capitalisation of £130bn. This is one big fat blue-chip: only Royal Dutch Shell is bigger at £200bn. It dwarfs rivals Lloyds Banking Group (£40bn), Barclays (£29bn) and RBS (£26bn).
HSBC is a truly global bank with a massive focus on China and Asia generally, where it generates almost 90% of its profits. Lloyds, by comparison, is mostly focused on the UK. Many investors have bought HSBC as a way of tapping into fast-growing Asian markets, but that hasn’t spared it from the general sell-off over the past year.
In fact, it has been made worse by US President Donald Trump’s trade war with China. This has aggravated underlying concerns about the world’s second-largest economy, which has only kept its economic boom alive with a massive stimulus binge. It has run up mind-boggling debts as a result, as much as $2.88trn by some estimates.
Yet other UK-listed banks have been hit harder. HSBC is down 10% in the last year, a similar-sized drop to Barclays and only half the 20% fall suffered by Lloyds and RBS. These falls reflect October’s volatility, although HSBC has partly recovered in recent weeks.
Rupert Hargreaves recently put his neck on the line and said he thought HSBC’s problems may only be temporary and the stock could be heading back towards 700p. Currently, it trades at 655p, so if he’s right that would suggest 6.5% upside from here.
Will it happen though? HSBC’s ‘pivot’ to Asia means it is taking a big punt on one region, but it’s easy to see why given wider profit margins and faster growth prospects. This has also insulated it from endless Brexit uncertainty.
HSBC currently trades at just 11.5 times forecast earnings, below the 15 times generally seen as fair value, while a price-to-book value of 0.8 also suggests there is some hidden value here. Interest rates are low but starting to rise, and that could help widen its net lending margins. Revenues are forecast to grow 3.2% and earnings per share 1.2% in the year ahead. Steady, but hardly spectacular.
The most attractive number is the dividend: HSBC offers a forward yield of 6.1%, which as Peter Stephens points out is more than four times the 1.5% you are likely to get from the average savings account. Naturally, even a company as big as this one is a riskier use for your money than leaving it in cash, especially as concerns over global economic growth slow. But if I was planning to invest £1,000 for five years, 10 years or more, I reckon HSBC could do a lot more for my money than any savings account.
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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and 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.