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Some investors might think HSBC’s (LSE: HSBA) share price has increased so much this year it cannot keep rising.
Others may believe the bullish momentum developed from its 11 March one-year traded low of £5.72 cannot be derailed.
As a former senior investment bank trader and longtime private investor I know neither view helps in optimising investment returns.
I am only interested in whether there is any value left in the stock. If there is, I will add to my existing stake in the bank. Otherwise, I will keep my position as is.
How does the stock’s price look in value terms?
Price and value are not the same thing. And the difference between the two is where the big profit opportunities lie, in my experience.
The key tool I use to determine the fair value of any stock is the discounted cash flow (DCF) method. This shows where any share should be priced, based on future cash flows for a firm.
Using other analysts’ figures and my own, the DCF for HSBC shows its shares are 45% undervalued right now. This is despite their big rise since March.
Therefore, the fair value for the shares is technically £16.31.
Market vagaries might push them lower or higher at different points, of course. But the DCF underlines to me that HSBC looks a steal to me at the current price.
How does the core business look?
The bank’s 2024 results released on 19 February saw profit before tax rise 6.5% year on year to $32.309bn (£25.66bn). This was higher than consensus analysts’ forecasts of $31.67bn.
Earnings per share increased 8.7% to $1.25, and the dividend per share rose 43% to 87 cents. These strong numbers enabled the bank to announce a $2bn share buyback expected to be completed by the end of Q1. These tend to support share price gains.
A risk to these numbers is a continued decrease in the bank’s net interest margin (NIM). This is the difference between the loan and deposit interest rates. It has fallen since the Bank of England resumed rate cuts last year.
HSBC’s NIM dropped from 1.66% in 2023 to 1.56% in 2024.
That said, the bank is shifting its strategy away from interest-based and towards fee-based business. Wealth and personal banking delivered over a third of its 2024 profits with this share expected to increase in 2025.
Overall, HSBC targets a return on tangible equity (ROTE) in the mid-teens in each of the three years from 2025 to 2027. Unlike return on equity, ROTE excludes intangible elements such as goodwill.
The high-yield bonus
The increase in 2024’s dividend has pushed HSBC’s yield up to 7.7%. By comparison, the average FTSE 100 yield is 3.5% and the FTSE 250’s is 3.3%.
So, investors considering an £11,000 (the average UK savings) holding in HSBC would make £12,699 in dividends after 10 years. After 30 years, this would increase to £99,004.
These numbers are based on an average 7.7% yield and the dividends being reinvested back into the stock.
With the initial £11,000 stake added in, the HSBC holding would be worth £110,004 by then. This would be paying £8,470 in yearly dividend income at that point.
Consequently, I will be buying more of the stock very soon.
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