Image source: Getty Images
FTSE equity shares play an important role in my investment strategy. They allow my portfolio to generate income, which I can choose to spend or reinvest (finding more dividend-paying stocks).
In October, I look forward to investing more HSBC (LSE: HSBA). Here is the reason.
Budget allocation for high yield
The global banking giant is offering a very attractive dividend these days. It has a yield of 7%, which is double the average FTSE 100 average. Although there is no guaranteed profit, the expected payout seems to be well covered.
According to media sources, HSBC plans to sell its South African assets. This follows the bankruptcy of Argentina, France, and Canada. The reason is that it wants to focus on Southeast Asia and China.
This strategy makes sense, given that the region is home to more than half of the world's population and some of its fastest growing economies. These include India, Vietnam, and the Philippines.
By 2040, Asia is expected to drive nearly 60% of global economic growth and contribute 90% of the 2.4bn new members joining the world's middle class. HSBC is focused on expanding its wealth management business to take advantage of the growing demand for financial services in the region.
China is a double-edged sword
For now, China is still a bit vulnerable. The world's second largest economy has been struggling, not helped by the asset crisis. A sluggish economic activity is clearly not good for HSBC.
Meanwhile, youth unemployment is still very high. In fact, I have been reading about young Chinese graduates who 'left' the countryside, fed up with the situation. Apparently some of them are trying to become social media influencers rather than working in low paying jobs.
To boost economic growth, Beijing recently approved a major stimulus package. We don't know if that will be enough, but investors have changed anyway and Chinese stocks have been rising.
Low prices ahoy
Another challenge is the drop in interest rates, which puts the lender's net interest rate at risk. In Hong Kong, its biggest market, the bank recently cut its lending rate for the first time in nearly five years.
To reduce the impact, HSBC has been cutting costs and using structural hedging (a financial strategy used to manage exposure to interest rate fluctuations). Despite these efforts, the situation still adds to the risk, in my opinion.
Bargain-basement stock
However I think the stock is undervalued relative to its growth potential. It trades at a price-to-earnings (P/E) ratio of just 7.8, below the FTSE 100 average of 15.
In July, the bank also announced a $3bn buyback of its own shares, following its $5bn buyback earlier this year. These programs can improve shareholder value by improving key metrics such as earnings per share (EPS).
In the long run, I think the bank's focus on Asia will pay off. As stated: “If the 19th century was about Europe, and the 20th about the US, the 21st century is about Asia.“.
In short, HSBC focuses on high growth economies and banking areas. The stock trades cheaply and offers a market-beating dividend yield of 7%. As soon as I have money, I will be taking stocks.
Source link
