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Will a reinstated HSBC dividend secure the stock’s future?

Karl Loomes
·3-min read
View of Canary Wharf
View of Canary Wharf

The HSBC (LSE: HSBA) dividend was one of the first things that drew me to it as an investment. I liked its brand and I liked its focus on Asia, where the market is opening up more. But mainly, I liked its payout. You’ll understand then, that I was not happy when the UK government forced the bank to suspend its dividend earlier this year.

And you won’t be surprised to hear that my attention was grabbed by headlines last week that the HSBC dividend may be reinstated. I never think a dividend alone is a good reason to invest — one always need consider a company’s (or share’s) future. That said, I still think this latest news is bullish for HSBC.

Better than expected

The dividend announcement came after the bank reported better than expected third-quarter results. Interestingly it took a fairly positive view in its economic outlook.

HSBC’s executives said the worst of the coronavirus crisis was behind us. Accordingly, the bank reduced its expected credit losses to $785m in the period. This still contributed to a greater than 50% decline in its third-quarter net profit, though the $1.4bn figure is far ahead of the $882m forecasted by analysts.

Of course here in the UK, things looked a lot better last week than they do this week. A second lockdown has been announced, and the effectiveness of a vaccine is being questioned after a news of people catching Covid-19 twice. A global recession is a real possibility. If this happens, a reinstated HSBC dividend will be just talk.

The HSBC dividend vs. the HSBC share price

As investments, the banking sector is dominated by the coronavirus and global recession uncertainty, I think. However, I also think HSBC has a lot of potential, if the economy holds out.

The bank makes most of its money in Asia – a market with a lot of potential for growth. What’s more, HSBC has restarted its previous restructuring plans. These plans included a reduction in staff, and a transfer of capital and investment away from the less profitable US and European markets. This capital is being shifted to its Asian business.

Personally I think this is a good move for two reasons. First, HSBC was overstaffed. It is fairly well known in the industry (and by analysts) that the bank had more people than it needed. As these numbers are slowly reduced, costs will fall too.

What is even more important, however, is the focus on its most profitable market. Though there is a certain argument against “putting all your eggs in one basket”, I think in this case the Pareto principle will be more telling.

The Pareto principle basically suggests that the majority of outputs (or costs) are created by a relatively small number of inputs. In the case of HSBC, the majority of its money is made in just the Asian market. The benefit of this is that by focusing on that minority of inputs one can increase the outputs exponentially.

The prospect of a reinstated HSBC dividend alone would not make me invest right now. I do think the bank could be a good investment, though. For now, I am just waiting to see what happens with the economy.

The post Will a reinstated HSBC dividend secure the stock’s future? appeared first on The Motley Fool UK.

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Karl has shares in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020