What UK company do you think spends more than any other on paying dividends? A high-yield one like British American Tobacco? Or a dividend stock with a lower yield?
The answer is the latter. Specifically, it is banking giant HSBC Holdings (LSE: HSBA).
At the moment, its 4.8% yield is well below the 6.1% offered by British American Tobacco, or even higher FTSE 100 yields such as the 9% on offer at popular dividend stock Legal & General.
However, HSBC still offers well above the 3.3% average yield of the FTSE 100 right now.
The financial services behemoth spends more on dividends than any other London-listed company.
In the first half alone, the bank shelled out over $8bn on ordinary dividends. It still had spare cash to play with (its target is currently to pay half its earnings, excluding material items and related impacts, as dividends), so is currently spending $3bn buying back its own shares.
In a way, it is not surprising that HSBC is Britain’s biggest-paying dividend stock. At around £180bn, it is also the country’s largest company by market capitalisation.
The HSBC share price is up 238% over the past five years.
In other words, HSBC has been an excellent investment in recent years.
A £1,000 investment five years ago would now be worth almost £3,400.
On top of that, the lower purchase price would mean that someone who invested back then would currently be yielding around 11.2% on their shares. That would equate to roughly £112 of passive income annually from a single £1,000 in this blue-chip dividend stock.
Past performance is not necessarily a guide to what will happen in future. Still, with its proven business model and massive profitability, could it make sense for me to add some HSBC shares to my ISA?
I certainly see a lot to like about the business.
HSBC’s massive profitability (pre-tax profit was $15.8bn in the first half) is built on some enduring advantages.
It has a strong presence in key markets, especially Hong Kong. It has been in the banking business for 160 years, giving it a huge depth and breadth of experience. It also straddles multiple markets in Asia and Europe, helping to give it some protection against underperformance in one market.
But its price-to-earnings ratio of 14 is a bit more than I would happily consider even for this juicy dividend stock. A common way to value bank shares is to look at the ratio of price to book value. Here, too, HSBC looks pricy to me.
That book value makes certain assumptions. If economic weakness leads to higher loan defaults, the value of loan books including HSBC’s could fall, making its valuation costlier than it may currently seem.