A Closer Look at HSBC Holdings' Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of HSBC Holdings  (LSE: HSBA  ) (NYSE: HSBC  ) and assessing whether the company is an appetizing pick for income investors.

How does HSBC Holdings' dividend history stack up?

  2009 2010 2011 2012
FY Dividend Per Share $0.34 $0.36 $0.41 $0.45
DPS Growth -46.9% 5.9% 13.9% 9.8%
Dividend Cover 1x 2x 2.2x 1.6x

Source: HSBC Holdings Company Accounts.

HSBC's dividend policy took a hammering in 2009, when regulatory uncertainty surrounding capital requirements prompted the firm to cut shareholder payouts substantially. The bank has since gotten its progressive dividend policy back on track, with meaty increases during each of the past three years, even though earnings per share (EPS) slipped 20% last year.

As well, HSBC has driven dividend coverage back toward two times forward earnings -- the broadly regarded benchmark signifying dividend safety -- although it slipped back below the measure in 2012.

What are HSBC Holdings' dividends expected to do?

  2013 2014
FY Dividend Per Share $0.51 $0.56
DPS Growth 13.3% 9.8%
Dividend Cover 1.9x 1.9x
Dividend Yield 4.4% 4.9%

Source: Digital Look. Exchange rate: £1=$1.51265.

City forecasters expect dividends to continue heading markedly higher in coming years, underpinned by EPS growth of 32% and 8% in 2013 and 2014 respectively. In addition, improving earnings are also predicted to drive dividend cover a hair's breadth below two times projected earnings.

HSBC announced in this month's interims that underlying pre-tax profit advanced 34% in the first quarter to $7.6 billion, with reduced impairment charges and the firm's ambitious restructuring programme helping to improve performance during the period.

The bank is aiming to strip another $2-$3 billion out of its cost base through further heavy job cuts by 2016, on top of the $4 billion it has already delivered over the past two years. HSBC is generating heaps of capital -- indeed, its core tier 1 ratio rose to 12.7% in January-March from 12.3% in the first three months of 2012 -- and is tipped to embark on a share repurchase scheme next year, if realized would provide an additional boon for shareholders.

How does HSBC Holdings' dividend prospects rate against the competition?

  Prospective Dividend Yield Prospective P/E Ratio
Banks 3.7% 13.1
FTSE 100 3.1% 16.3

Source: Digital Look.

HSBC currently changes hands on a P/E multiple of 11.3 for this year, below the corresponding readings for both the wider banking sector as well as the FTSE 100, while the institution also outstrips both groups in terms of predicted dividend yield. In my opinion, HSBC is a great stock market pick for those seeking reliable dividend income moving forwards.

The company's transformation plan is expected to continue improving earnings in coming years, while galloping activity in developing markets -- the Asia-Pacific region in particular now accounts for 90% of total profits versus 60% in 2011 -- should underpin long-term revenue growth. I believe that this all bodes well for shareholders' dividend prospects.

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