AsHSBCs (LSE: HSBA)shares have plunged to a three-year low during the past few months, the companys dividend yield has risen to an impressive 6.3%.
However,a high dividend yield such as HSBCs can often signal that the market is losing its faith in the companys ability to main the payout. A falling share price can indicate adividend cut or, worse, the elimination of the dividend.
Prioritising the dividend
HSBCs management has put the companys dividend policy at the top of it agenda. Unfortunately, by taking this route, the company is prioritisingdividendsover growth, which isnt a great long-term investment strategy.
At the beginning ofJune, HSBC laid out its plans to safeguard the dividend by cuttingone in five jobs and shrinking its investment bank. Whats more, the bank intends to cut its assets by aquarter, or $290bn by2017. These cuts will reduce the size of HSBCs investment bank assets to less than a third of total group assets, from 40% now.
So far, the strategy of slashing costs to boost returns hasnt worked out for the bank. The higher cost of doing business in a tougher post-crisis business environment thats overshadowed bynew rules on risk and compliance wont fall just because HSBC decides to shrink its balance sheet and cut staff numbers.
Overall, HSBC will push through annual cost savings of up to $5bn by 2017. It will cost up to $4.5bn during the next three years to achieve the savings.
Exiting markets
In addition to cost savings, HSBC is planning to exit the marketswhere a weakperformance or high conduct costs and fines have destroyed value. The markets that tick this box are Brazil, Turkey, Mexico, the United States and Britain.
And as HSBC exits these markets, the bank is refocusing its growth efforts onChina. HSBC alreadygeneratesa significant chunk of its income in Hong Kong and has become reliant on this market to produce group growth. For thefirst-half of 2015, HSBCs profit jumped 10%, thanks to aninvesting frenzy in Hong Kong among individual customers prompted by Chinas soaring markets earlier in the year.
By exiting underperforming markets, HSBC is reducing its international diversification, and global footprint, the one thing that makes it unique. Over the next fewyears, HSBC will become a more Asia-focused bank, and as a result, the banks growth will become highly correlated to Chinas economicsuccess.
Its no secret that Chinas debt-laden economy is struggling.HSBC stands to take a huge hit if Chinas growth hits a wall. Many Asian economies feed off Chinas success, and any slow-down will reverberate across the region.
So all in all, by reducing its international diversification and focusing on China, HSBCis putting itself in a very vulnerableposition. Focusing on China may not be the best decision for the bank.
Dividend plays
HSBC could be forced to slash its dividend payout if China’s economic growth grinds to a halt.
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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.