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In the last four years, having shares in the HSBC (LSE: HSBA) has been very profitable for some investors. First, HSBC’s share price increased by a staggering 159% during that period.
Not only that, but FTSE 100 paid a dividend of 6.4 %. That’s already attractive in my opinion. But if I had bought at that low time four years ago, I would be now yields more than 16% every year from this blue-chip bank share.
I didn’t buy at the time – but I’ve been thinking about the rise in HSBC’s share price and here are a few lessons I’ve taken from it.
The market is really irrational
Sometimes when a share price is high or low, it is easy as an investor to think that there is a good reason for that.
There is a long-standing debate about how the stock market values companies, pricing all known risks and opportunities at any given time. If the market was completely rational, in my opinion, it would cut off some profitable opportunities for investors.
Is HSBC worth 159% more as a business than it was four years ago?
The risks have changed, and the risks of the pandemic have decreased. But many fundamentals, from a strong product to a large customer base especially in Hong Kong, remain the same.
So I see HSBC’s rising share price as a reminder that – sometimes at least – the share looks really cheap. is something cheap ones. That would be true of a big blue-chip global bank, not just an obscure market minnow.
Current yield and future yield are not the same
Back in late 2020 HSBC, along with other British banks, had suspended dividend payments. Therefore, although the bank had been a good dividend payer, the outlook for shareholders from an income perspective was uncertain.
But the dividend came back and, as I explained above, the yield that would be there today in late 2020 (although it was not clear at the time) was close to 17%.
That’s huge. It’s a good reminder that looking at current earnings or dividend history is not a guide to what will happen in the future. Instead, I try to focus on how much free cash flow I believe the company will generate over time and how likely it is to use that to fund dividends.
How will I use these lessons?
Just because HSBC’s share price has gone up doesn’t mean it’s worth more. Indeed, it even now trades at an earnings ratio of less than 8.
But I continue to stay away from bank stocks for now because I see the risk that a weak economy could hurt earnings.
Still, that doesn’t mean I haven’t learned anything from HSBC’s stellar share performance over the past few years. Now I hope to apply those lessons as I continue to look for stocks to buy.
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