With a dividend yield around 5%, HSBC Holdings (HSBC 0.21%) has become a popular stock among income investors. That yield doesn't even include a special dividend expected later this year that will bump the yield even further.
Despite a healthy dividend, however, shares haven't generated much upside in recent years. A post-pandemic rally saw the stock more than double in value, but over the last five years, shares have lost nearly 25% of their value.
Is this a great time to buy a high-income stock at a discount, or will shares continue to underperform?
Betting big on Asia
HSBC is one of the largest banks in the world, serving 40 million customers across 62 countries and territories. While it's a diversified international player, its business is dominated by a single region, Asia, which generates roughly half of its revenue.
Of course, there is another half to HSBC's business, which generates revenue from dozens of countries through products and services like commercial banking and wealth management. But make no mistake: Wherever Asia goes, so will HSBC stock. The company has even made recent moves to become more Asia-focused. Last year, it not only agreed to sell its Canadian arm to Royal Bank of Canada for $10.2 billion, but also committed to purchase Citigroup's wealth management unit in China, which manages around $3.6 billion.
If you want to invest in HSBC, you have to be bullish on Asian economies, particularly China and Hong Kong.
Should you bet on Asia?
Most of HSBC's decline over the past five years has stemmed from a slowdown in Asia's economic growth, a trend that isn't expected to change anytime soon. The World Bank, for example, is expecting China's 5.2% GDP growth in 2023 to slow to 4.5% in 2024, falling again to just 4.3% in 2025. The years of rapid economic expansion in Asia, even in smaller jurisdictions like Hong Kong and Vietnam, are long behind us.
The good news is that the market already knows this, and has valued HSBC stock accordingly. On a price-to-book basis -- a valuation metric that highlights how much the market is willing to pay for a bank's assets -- HSBC shares now trade at a sizable discount to its international peers.
In the early 2000s, for comparison, when economic growth in Asia led the world, the bank was priced at a premium to its peers. Investors today are hardly overpaying for the stock, at least on a relative basis.
HSBC Price to Book Value data by YCharts
Is HSBC stock a buy at the current depressed valuation? Many signs point to yes. Overall economic growth is slowing, but HSBC is capitalizing on its competitors' desire to exit the market. Besides agreeing to sell its Canadian business unit and purchase Citigroup's wealth management division in China, HSBC has also agreed to sell its businesses in countries like Greece, Russia, Mauritius, New Zealand, and France. It's all part of a plan to streamline operations and shift capital toward Asian markets, which trade at a historical discount.
Growth in Asia isn't what it used to be, but HSBC is using that to its advantage through cost-effective acquisitions. Because HSBC stock also trades at a historical discount, the bank's investors appear to be getting a double-bargain.
Don't worry about the dividend
HSBC is exposed to slower-growth markets, but the current valuation already reflects that reality. The bank's management team, meanwhile, is setting the company up for success with new market conditions in mind. As for the dividend, it appears in no danger.
After reducing its dividend during the early stages of the pandemic, HSBC's payout ratio -- the share of net income that a dividend eats up -- is well below 50%, while capital recycling programs abroad continue to generate billions in excess free cash flow. From a liquidity standpoint, there is also little concern. HSBC's Common Equity Tier 1 ratio, for example, which measures a bank's capital versus its assets, stands at 14.9%. JPMorgan Chase, for comparison, which leads the U.S. market, stands at 14.3%.
With a reliable dividend yielding 5%, a rock-bottom valuation, and a strategy for picking up hometown assets on the cheap, HSBC looks like a reasonable pick for income and value investors alike.
