Friday, 25 May 2012

Is it time to buy HSBC?

Is now a good time to invest in HSBC? With the current share price of around 515p and a dividend yield of 5.1% the shares seem attractive. The dividend has increased from 34cents a share in 2009 to 36cents in 2010 and 41cents in 2011. Analysts forecast approx 43.5cents for 2012 and approx 48cents for 2013. The dividends are still below pre-financial crisis levels but this is to be expected with share dilution. In 2007 there were approx 11.5 million shares in issue, today there are just over 18 million. 

A 48cent dividend for 2013 would give a 17% increase on the 2011 dividend of 41cents. This gives a 8.2% annualised increase over the two years.

Margin of Safety
Now we have the basic figures it's time to get tough.

Analyst estimates. Well let's not take them too seriously. For individual stocks I will use a going forward estimate of dividend growth of between 33 and 40% of what the analysts forecast. As HSBC is a giant corporation using 40% of the analyst estimates would be reasonable.( For smaller stocks with more risk I prefer to use 33%). This gives us a dividend growth rate of 3.28% for HSBC which is a fairly conservative rate and not much more than inflation.

Dividends. The stock must have increased or kept its dividends constant over the last 3 years. I prefer to use dividends compared to earnings as dividends are harder to fake. As another precaution I will take the average dividend for the past 3 years to give the dividend yield. HSBC has paid out 111cents in dividends in the last 3 years giving an average dividend of 37cents. At the current share price this gives a dividend yield of about 4.6%.

Historical stock prices. The final piece of the jigsaw is a reversion to the mean of stock market values. In recent times I feel that stocks have been expensive in comparison to historical values. Therefore I use a historical dividend yield of 5.5%. What this means is that sometime in the future I expect stocks to revert back to a mean price whereby they yield a 5.5% dividend. So for the dividend yield of 4.6% HSBC share price needs to fall by 16% to give a 5.5% yield. If we take a long term view and discount this over the next 20 years we get an annual adjustment of about -0.9%
Using these figures we can calculate an estimated return for HSBC as:

Dividend Yield + Dividend Growth + Share Price Adjustment
This gives:
4.6% + 3.28%+(-0.9%)=6.98%

So approximately a 7% annual estimated return.

Below is the price chart for HSBA.L

The stock is currently on an uptrend based on the fact that the most recent 100 day support/resistance line was broken in the middle of February to the upside. The price is getting close to its 100 day low which could represent a buying opportunity. However if the price breaks below this it would be wiser to wait on the sidelines until a positive trend is reconfirmed.

So there you have it. HSBC looks a fairly good investment at these prices. Personally I'm not keen on banks as their business models are complex, but a giant like HSBC with a lot of growth in Asian markets could represent a good investment with a good yield. The above valuation criteria include generous margins of safety. The name of the blog "The Accidental Millionaire" refers to the fact that the investments we make are so strict that it's possible to make a lot more than our conservative estimates. With current data I would put a price target of 675-680p a share (this target would increase as the dividend increases) which is over 30% above the current price. At those prices the return going forward would be less attractive and opportunities elsewhere would likely yield higher expected returns.

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