Is HSBC’s dividend under threat?

Is HSBC’s dividend under threat?

The sustainability of HSBC’s dividend payout has split opinion after China’s slump and broader market falls pushed the stock’s yield above 6.5 per cent.

The bank was the third largest dividend-paying UK stock of last year, according to Capita, but it has come under pressure this year as profits dip and a retrenchment strategy begins.

These issues have been compounded by investor uncertainty over the economic outlook for Hong Kong, one of the bank’s most significant markets.

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As of September 4, HSBC was yielding 6.5 per cent, its share price having fallen 17 per cent year to date – considerably underperforming the FTSE 100’s 5 per cent decline.

Eric Moore, co-manager of the £195m Miton Income fund alongside Gervais Williams, said that while a dividend cut was unlikely to materialise in the near term, more turmoil in China would increase pressure on the payout.

“[The bank] is going to defend the dividend as much as it can, but the question is whether it is overtaken by events in China and Hong Kong,” said Mr Moore, who does not own the stock.

“If the Chinese situation develops into a more fully blown financial crisis, then that is a concern.”

Analysts at Macquarie said HSBC represented a “value trap” in May, adding that the dividend would be at risk if the bank did not undergo a more significant strategic overhaul.

The bank posted pre-tax profits of $18.7bn (£12.3bn) for 2014 – a year-on-year fall of 17 per cent – and it is currently scaling back its operations in a number of emerging markets.

Alastair Mundy, who manages the £1.3bn Investec UK Special Situations fund and had an 8.5 per cent holding in the bank at the end of July, acknowledged that the company’s share price “does reflect the risk of a dividend cut”.

However, as a growth-focused investor Mr Mundy said he is not overly concerned by the prospect.

“The dividend isn’t overly important to our investment decision,” he said.

“If the yield goes up we get a nice dividend. If it gets cut we have to make our returns in capital growth.”

Others are more upbeat on its payout. Michael Clark, who manages the £1.1bn Fidelity Moneybuilder Dividend fund, said he does not think there is “any concern”.

“It looks good from a yield point of view now the share price has come down to the £5 level,” Mr Clark said.

“The reason it has come down is the market wobble. It’s not really anything to do with HSBC.”

Meanwhile, Clive Beagles, manager of the JO Hambro UK Equity Income fund, took advantage of the slump in the bank’s valuation to add exposure in both July and August.

Mr Beagles was overweight the stock by 1.65 percentage points as of August 31.

“We are now overweight the banking sector for the first time since 2007-08,” the manager said in his monthly update.

Mr Beagles added to Lloyds as well as HSBC last month.