LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment, and as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.
To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.
Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.
So this series aims to identify appealing FTSE 100 investment opportunities, and today I'm looking at HSBC Holdings (LSE: HSBA ) (NYSE: HSBC ) , the well-known banking and financial services company with global operations.
With the shares at 765 pence, HSBC's market cap. is 142,000 million pounds.
This table summarizes the firm's recent financial record:
|Year to December||2008||2009||2010||2011||2012|
|Net cash from operations ($m)||30,420||6,898||55,742||79,762||(9,156)|
|Earnings per share (cents)||136.56||34||73||92||74|
|Dividend per share (cents)||64||34||36||41||45|
Like most banks, HSBC has been busy putting its house in order after the financial crisis exposed the sector as being in dire need of fundamental deep cleaning. The directors have been paying keen attention to the regulatory reform agenda mandated by the G20 and expressed through the Basel Committee on Banking Supervision's requirements. The committee's current document is Basel III, which it first published in late 2009, in the depths of the crisis. One keenly monitored metric is core tier 1 capital ratios -- a measure of a bank's financial strength that compares its best capital assets, like cash and equity capital, to its more risky assets, like loans. HSBC achieved an almost 22% increase in its core tier 1 capital ratio to 12.3% during 2012. It's easy to see the progress the bank has made when you consider that the ratio was just 7% in 2008, and that means that the company has a solid financial base to expand into the emerging markets it is targeting.
The firm is busily selling off badly performing areas of its business, reorganizing its operations, cutting costs, and focusing its investment capital in a process that is actually very similar to what most companies have been doing in recent years. I think the recent financial record in the table shows how tough the journey has been for HSBC. But the directors are bullish and, with underlying revenue up 7% and underlying operating profit up 18% with the full-year results, the firm's financial spruce up could help HSBC shine on total returns as economies continue their slow recovery.
HSBC's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:
1. Dividend cover: adjusted earnings covered last year's dividend around 1.6 times. 3/5
2. Borrowings: net debt is running at just over three times operating profit. 2/5
3. Growth: revenue, earnings and cash flow average out to flat-looking performance. 2/5
4. Price to earnings: a forward 11 or so compares well to growth and yield expectations. 4/5
5. Outlook: good recent trading and a positive outlook. 5/5
Overall, I score HSBC 16 out of 25, which encourages me to believe the firm has some potential to out-pace the wider market's total return, going forward.
Although the business-quality metrics seem lackluster, the outlook is positive and recent trading has been good. Given expectations, the valuation seems modest.
I'm tempted to pick up a few HSBC shares for their forward dividend yield, which is running at about 4.8%. But I'm also excited about an idea from the Motley Fool's top value investor who has discovered what he believes is the best income generating share-play for 2013. He set's out his three-point investing thesis in a report called "The Motley Fool's Top Income Share for 2013," which I recommend you download now. For a limited time, the report is free so, to download it immediately, and discover the identity of this dividend-generating star, click here.