LONDON -- In this series, some of your favorite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.
In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up the most points at the end of the contest.
Stepping into the ring today are the FTSE's biggest banks, HSBC (LSE: HSBA.L) and Standard Chartered (LSE: STAN.L).
Fears about the global economy and the sovereign debt crisis in Europe have eased somewhat as of late. While the FTSE 100 is down 1% over the last six months, it has risen 8% in the last three months.
The shares of HSBC and Standard Chartered have broadly tracked the index. HSBC is up 7% and Standard Chartered up 10% over the last three months.
Let's take our seats at ringside.
Round 1: Earnings
|
|
HSBC |
Standard Chartered |
|---|---|---|
| Recent share price | 582 pence | 1,501 pence |
| Last year price-to-earnings (P/E) ratio | 9.7 | 11.9 |
| Current year forecast P/E | 10.1 | 10.9 |
| Four-year average earnings per share (EPS) growth (%) | -4 | 15 |
| Current year forecast EPS growth (%) | -3 | 9 |
| Forecast operating margin (%) | 33 | 39 |
Sources: Digital Look, Morningstar, company reports. Winners in bold.
HSBC takes points for its "value" P/E rating, but Standard Chartered is very strong on earnings-growth fundamentals and snatches the round with its superior operating margin.
Round 2: Dividends
|
|
HSBC |
Standard Chartered |
|---|---|---|
| Last year dividend yield (%) | 4.3 | 3.0 |
| Current year forecast dividend yield (%) | 4.8 | 3.5 |
| Four-year average dividend growth (%) | -9 | 10 |
| Current year forecast dividend growth (%) | 11 | 17 |
| Forecast dividend cover | 2.1 | 2.6 |
Sources: Digital Look, Morningstar, company reports. Winners in bold.
Once again, HSBC takes points for a "value" rating -- in this round, it's a markedly higher dividend yield. But again Standard Chartered fights back with strong growth fundamentals, and pinches the round with its superior dividend cover.
Round 3: Balance sheet
|
|
HSBC |
Standard Chartered |
|---|---|---|
| Price-to-book (P/B) ratio | 1.1 | 1.4 |
| Core tier 1 capital ratio (%) | 11.3 | 11.6 |
Sources: Digital Look, Morningstar, company reports. Winners in bold.
The companies share the points in the final round, HSBC again scoring on the "value" measure (P/B, in this round) and Standard Chartered scoring on superior capital strength.
Overall, Standard Chartered wins two rounds and draws one round. However, the victory is rather tighter on the points tally, where Standard Chartered scores seven points and HSBC five.
Post-match assessment
The battle of the FTSE's two big banks was an intriguing one, not least because HSBC took all the points on the valuation ratios of P/E, dividend yield and P/B, while Standard Chartered took all the points on business fundamentals: earnings and dividend growth, margin, dividend cover, and capital strength.
Investors are faced with a difficult choice. HSBC may be cheap, or it may be a value trap, while Standard Chartered may be relatively expensive, or its strong fundamentals may more than compensate for the higher rating. So, for example, HSBC's forecast P/E of 10.1 versus Standard Chartered's 10.9 wouldn't look so great if the companies' earnings growth rates continued at their present rate for just a couple of years.
Sometimes, when earnings visibility isn't great and when balance sheets are complex and opaque, as they are with the banks, opining on the relative merits of two companies is little more than a shot in the dark. Investors may do better simply by moving on to sectors where there is more clarity and fewer potential banana peels.
That's exactly what top City investor Neil Woodford did ahead of the credit crunch. He sold out of bank stocks completely and hasn't been near them since. By focusing on strong cash-generating and dividend-paying companies, Woodford has been able to outperform the market by more than 300% over the past 15 years.
If you're interested in learning more about this master investor's enormously successful investing strategy -- and about the blue-chip companies he currently favors -- I recommend you download the Motley Fool's free exclusive report, "8 Shares Held by Britain's Super Investor." The report will be in your inbox in seconds if you simply click here.
Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors of 2012" -- our guide to three favorable industries. This free report will be dispatched immediately to your inbox.
Further investment opportunities:
G. A. Chester owns does not own shares in any of the companies mentioned in this article.
