At first glance, it may seem silly to suggest thatHSBC(LSE: HSBA) andAviva(LSE: AV) would make the perfect pair. However, the two finance firms both have many attractive traits that complement each other.
For a start, HSBC is an Asia-focused bank, and the group is planning to increase its Asian presence over the next decade. At the same time, HSBC is retreating from some European markets and other emerging markets around the world.
On the other hand, Aviva is focused on growing its European presence but lacks a significant presence in Asia. Avivas business is growing rapidly within emerging markets like Poland and Turkey.
Whats more, both Aviva and HSBC are recovery plays. HSBC is still trying to cut costs and streamline its operations as Aviva simplifies its business to concentrate on cash generation.
Restructuring
According to initial figures, HSBC is planning to slash around 8,000 jobs in the UK and a further 16,000 positions outside the UK to reduce costs. The group is planning to cut its global headcount by 10% overall. Further, HSBC is looking to sell itssubsidiaries in Brazil and Turkeywhile the UKbanking subsidiary is to be ring-fenced or spun-off.
Overall, the group plans to cut approximately$5bn of annualised expenses over the next few years.At the same time, the bank will be investing in Asia, South East Asia in particular. Management is planning to expand HSBCsasset management and insurance activities in the region.
So, HSBC could be a great play on Asia economic growth. Meanwhile, Avivacould be a great play on Europes aging population.
Play on Europe
As one of the UKs largest pension and savings providers, Aviva has economies of scale few other insurers can achieve. Under the new CEO, Mark Wilson, it seems as if the group has one primary goal; to build a strongly performing European composite insurer with good cash generation can one day fund a lot of growth further afield.
The recent acquisition of Friends Life should only accelerate Avivas progress towards this goal.
Indeed, its estimated that Friends will boost Avivas cash flow by an additional 600mper annum. A sizable sum that should help reduce Avivas 2.8bn of internal debtowed by Avivas Life companies to the groups General Insurance arm. Also, the extra cash flow, coupled with cost savings realized from the merger will Aviva to boost its dividend payout.
Aviva currently yields 3.7%,but City analysts believe that the company will hike the payout by 17% this year. Based on these forecasts the companys shares will support a yield of 4.2% for full-year 2015. Further dividend growth is expected during 2016. Analysts expect Aviva to hike the payout another 17%, which should leave Avivas shares yielding 4.9%.
Income investment
HSBC is also an attractive income investment. The bank currently supports a dividend yield of 5.8%, and analysts believe that this yield figure is set to hit 6% next year. HSBCs dividend payout is covered one-and-a-half times by earnings per share.
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Rupert Hargreaveshas 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.
Rupert Hargreaveshas 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.