Dear Mr. Berko: My father died last year, and the assets from his will have been distributed. Among the stocks he left to my brother and me are 250 shares each of HSBC Holdings. The other investments are mutual funds, pharmaceutical stocks, utility stocks and certificates of deposit, all of which we have some understanding and working knowledge of. The stockbroker we consulted was our father's broker, and he told us we should keep everything. I've enclosed a copy of the account for you to look at. My husband insists we should sell HSBC Holdings because it's a foreign bank stock and he thinks foreign bank stocks will fall to the cellar this year or next. But my brother and I will be guided by your advice on this stock.
Dear CL: Your father had a darn good broker. And if you keep this guy, you and your brother will have a darn good broker, too. There's no reason to sell anything, including HSBC Holdings (HSBC-$43.40). Perhaps your husband feels threatened by this inheritance and needs to establish his territory. That's not unusual, and if you care to keep him as a spouse, let him have some say.
HSBC, formerly known as The Hongkong and Shanghai Banking Corp., headquartered in London, is one of the five largest banks in the world and could soon be the world's leading international bank. HSBC was founded in 1865 by Thomas "Big Tommy" Sutherland, a Scottish banker and politician, to finance trade between Europe and Asia. Big Tommy's bank initially opened its doors in Hong Kong and has weathered political and social revolutions, economic and management crisis, new technologies, and wars. HSBC's 256,000 employees serve over 200 million people. The company has a presence in 71 countries via 4,016 offices on six continents and controls $2.3 trillion in assets.
Since 2003, HSBC's earnings have been erratic, remarkable, predictable, unpredictable, impressive, disappointing and satisfying. Still, I'll recommend HSBC for the following reasons: 1) Its tremendous geographic diversification gives it direct exposure to the fastest-growing economies in the world for HSBC's products and services - e.g., checking accounts, consumer and corporate banking, consulting fees, underwriting, commodities trading, credit cards, insurance, wealth management, trust accounts and international trade. 2) Its diversification benefits were highlighted during the recent financial crisis. While HSBC took huge losses in North America, other operations generated revenues significant enough to allow HSBC to report profits in 2008 and 2009 - though management cut the dividend in 2009, from $4.65 to $1.70. 3) The bank has had offices in numerous countries for over 100 years and has accumulated a deep well of local knowledge, customs, trust and contacts that are the envy of its competitors. 4) HSBC's impressive global network is exposed to 90 percent of the world's global trade and capital flow.
HSBC's loan impairment charges jumped by 38 percent for 2016 because of weak fundamentals in the oil and gas and metals and mining industries and the political and economic problems in Brazil and Argentina. HSBC's credit quality needs some fine-tuning, and operations at various profit centers could be run more efficiently. But management has been fine-tuning its balance sheet, cashiering underperforming assets, using more advanced technology and redeploying capital to endeavors that promise to improve return on assets.
Here's the AARP version for this year's performance. Management seems to be on track. Return on assets in 2017 should come close to 0.9 percent, which would be up from 2016's 0.4 percent. Return on equity was 5 percent in 2016 and could leap to 9.6 percent this year. Earnings for 2017 are expected to be $4.30 a share, up from last year's $2.25. And the $2.55 dividend, yielding 5.9 percent, could be raised to $2.65 in 2018.
Hang your hat on HSBC! Thomson Reuters, Merrill Lynch, Citigroup and BNP Paribas will give you similar advice. Even the old, venerable Value Line favors HSBC "for the years ahead." Morningstar notes that the 5.9 percent dividend is well above the median and suggests that HSBC shares could reach $47 this year. That'd be a quiet 14 percent total return.