Can HSBC Holdings Outperform JPMorgan Chase?

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100, FTSE 250 and the U.S. stock market.

I'm going to use three key criteria -- value, income, and growth -- to compare companies to their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and -- I feel -- are outweighed by the investing potential of the American market.

Today, I'm going to take a look at British-Asian banking giant HSBC Holdings  (LSE: HSBA  ) (NYSE: HSBC  ) and America's largest bank, JPMorgan Chase (NYSE: JPM  ) .

1. Value
The easiest way to lose money on shares is to pay too much for them -- so, which share looks like a better value, HSBC, or JPMorgan?

Value HSBC JPMorgan
Current price-to-earnings ratio (P/E) 14.5 9.2
Forecast P/E 10.9 8.8
Price-to-book ratio (P/B) 1.1 0.9
Price-to-sales ratio (P/S) 2.8 1.9

On the face of it, JPMorgan looks better value than HSBC, with a below-average P/E ratio and a price to book (P/B) ratio below one, indicating that the company's theoretical breakup value may be greater than its market capitalization. In contrast, HSBC's current P/E and P/B ratios suggest it is fully valued at present.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do HSBC and JPMorgan compare in terms of income?

Value HSBC JPMorgan
Current dividend yield 4.3% 2.5%
5-year average historical yield 4.5% 2.1%
5-year dividend average growth rate -11% -4.1%
2013 forecast yield 4.7% 2.9%

Most U.K. stocks offer a higher yield than their American counterparts, and HSBC is no exception, with a five-year average yield that is more than twice that of JPMorgan. Although that gap is closing as the American banking sector recovers from the financial crisis, HSBC's 4.7% forecast yield is more than 50% higher than JPMorgan's forecast yield of 2.9%.

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.

How do HSBC and JPMorgan shape up in terms of growth?

Value HSBC JPMorgan
5-year earnings-per-share growth rate -12.9% -4.7%
5-year revenue growth rate -9.3% 3.7%
5-year share price return -17.8% 11.1%

JPMorgan looks the stronger of the two banks in terms of recent growth, but last year saw both banks take knocks to their previously untarnished reputations. In JPMorgan's case, London-based rogue trader Bruno Iksil -- who became known as the London Whale -- triggered a $5.8 billion loss for the U.S. bank. Meanwhile, HSBC set a new record for banking fines when it agreed to pay out $1.9 billion to U.S. and U.K. regulators to settle money laundering charges relating to the Mexican drugs trade.

Although both banks could afford the losses, they did make a dent in last year's profits, contributing to a 20% drop in earnings per share for HSBC, and reducing JPMorgan's otherwise impressive earnings growth.

Should you buy HSBC or JPMorgan?
As a U.K. investor with a focus on dividend income, my choice would be HSBC -- and although its shares look quite fully valued at present, the bank's 4.7% forecast dividend yield is much more attractive than JPMorgan's 2.9% forecast yield, and in my view is enough to justify HSBC's current share price.

If I was looking for a value investment, I would choose JPMorgan. The American bank's current share price gives it a price to book ratio (P/B) of less than one and a trailing P/E ratio of just 9, well below the U.S. and U.K. market averages, providing the potential for a rerating as investors regain confidence in the bank and its CEO, Jamie Dimon.

2013's top income stock?
Although both HSBC and JPMorgan are attractive income shares, the U.K. utility sector remains one of the best places to find reliable, high-yielding income stocks. But not all utilities are equal and some are facing serious challenges that could lead to dividend cuts.

The Motley Fool's top analysts have looked closely at all of the listed U.K. utility companies and identified one FTSE 100 utility share which offers a 5.7% dividend yield and which they believe may be undervalued by up to 20%. They are so confident in this share that they've named their report "The Motley Fool's Top Income Stock For 2013!"

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