After a difficult start to the year, when shares in the company fell by as much as 11%, HSBC (LSE: HSBA) (NYSE: HSBC.US) has enjoyed a strong couple of months. Indeed, shares in the bank have risen by 9% since the start of July and, although they are still down 2% since the turn of the year (while the FTSE 100 is up 1%), they seem to be experiencing an uplift in sentiment that could last a little longer.
However, looking further ahead, HSBC could see its share price rise to as much as 743p and deliver a total return of 24.5% over the medium term. Heres how.
Unlike most major banks in the UK, HSBC remained profitable throughout the credit crunch. In fact, it has increased dividend per share payments in each of the last four years, which, when you consider just how challenging that period has been for the banking sector, is a remarkable achievement.
Furthermore, HSBC has the potential to continue to remain highly profitable in future years, with the company being well placed in key emerging markets, notably China, while maintaining a keen exposure to the developing world, too. It therefore seems to offer a diversified and resilient earnings profile, which should continue to appeal to investors and firm up sentiment over the medium to long term.
As well as resilience and diversity, HSBC also offers strong growth prospects. Take the next two years as an example. HSBC is forecast to increase earnings per share (EPS) by an impressive 7% in each of the next two years. This means that 2015s net profit is expected to be 14.5% higher than it was in 2013. With shares trading on a trailing price to earnings (P/E) ratio of 12.8, this means that if they maintain their current valuation then they could be trading 14.5% higher in two years time. This would equate to a share price of around 743p.
As mentioned, HSBC pays a generous dividend, with it having increased on a per share basis in each of the last four years. Shares in the bank currently pay 31p in dividends and are expected to increase this amount to 33.6p next year. This works out at yields of 4.8% and 5.2% at the current share price of 649p, which, when added to the previously mentioned 14.5% gain, means that HSBC could offer a total return of 24.5% over the next couple of years.
Certainly, the forecasts must be met and the current rating maintained. However, with HSBC having a relatively resilient earnings profile and a P/E ratio that is not expensive, both of these expectations appear to have a good chance of being fulfilled. As a result, HSBC could be a great buy at its current share price.
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Peter Stephens owns shares of HSBC Holdings. 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.