HSBC(LSE: HSBA) (NYSE: HSBC.US) supports one of the most attractive dividend yields in the FTSE 100. At current levels, the bank supports a dividend yield of 4.6% and the City has a yield of 4.8% pencilled in for next year.
Nevertheless, this hefty payout is not gold plated and the bank has been forced to cut its payout before. So the question is, can you really trust HSBCs dividend?
HSBC has been working hard to transform itself over the past few years. The bank is currently in thesecond phase of a turnaround plan that began during 2011, designed to make the bank less complex and more efficient. As part of this plan, management has axed more than 40,000 jobs and sold or closed 60 businesses, producing annual cost savings of more than $5bn.
Unfortunately, despite HSBCs best efforts to cut some costs, other costs are rising. For example, during the first half of this year HSBCs management reported that the bank was now spending $700m to $800m per annum on compliance and risk management, an increase of around 20% compared to last year.
As a result, underlying operating expenses ticked higher by 4%, to $18.2bn, pushing the banks cost efficiency ratio up to 58.6%, from 53.5% as reported last year. Management is targeting at mid-50s cost efficiency ratio.
At the same time HSBCs sales are falling, as the bank pulls out of some markets. Second-quarter underlying revenues fell 4%, to $31.4bn, from $32.7bn a year earlier.
So, with costs rising and revenues falling HSBCs earnings are sliding. Second quarter pre-tax profit fell to $12.3bn, 12% lower than the $14.1bn it earned in the corresponding period in 2013. HSBCs first-half earnings per share dropped nearly 10% from $0.54 last year, to $0.50 this year.
Still, during the first half HSBC paid out approximately $0.20 per share in dividends, easily covered by earnings per share of $0.50 but risks remain. Indeed, the banks management revealed during the first quarter of this year that it is not possible to tell how much capital the HSBC should be holding in reserve.The bank could be required to boost its capital position at short notice.
That said, HSBC does have a solid financial cushion. The tier one capital ratio stood at 11.3% at the end of the second quarter. However, with a balance sheet in excess of $2trn, HSBC is extremely exposed to sudden shocks. If the bank were to need more capital, the dividend would be the first thing to go.
Safe for now
For the time being at least HSBCs dividend looks to be safe, although I would strongly recommend that you do your own research before making any trading decision.
To some, the banking sector may appear daunting. Indeed, the complex numbers and formulas used to value banks can be daunting for even the most experienced analyst.
To help you analyse the sector, analysts at The Motley Fool have put together a free and without obligation guide to the banking sector called‘The Motley Fool’s Guide To Banks.’
The guide is jargon-free, simple and can be put into use right away — you don’t need to be a banking expert to take advantage of it!
It Why not take a look at the free report now, byclicking here.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.