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HSBC (LSE: HSBA) shares fell after the 30 July release of its H1 results. This was to be expected, as they showed a 26% year-on-year fall in pre-tax profit to $15.81bn (£11.74bn). The number undershot analysts’ forecasts of $16.5bn.
This largely resulted from $2.1bn of impairment losses at HSBC’s associated Bank of Communications (BOC). This is when an asset’s fair market value falls more than its book value previously stated in a company’s financial documents. BOC’s value hit came from its exposure to bad loans related to China’s real estate market.
A risk for HSBC remains continued uncertainty in the Chinese economy. However, the country experienced economic growth of 5.2% in Q2, surpassing analysts’ forecasts of 5.1%.
Additionally positive is that HSBC is targeting a return on tangible equity (ROTE) in the mid-teens from now to end-2027. As with ‘return on equity’, ROTE is a firm’s net income divided by average shareholders’ equity. However, ROTE does not include intangible elements such as goodwill.
And consensus analysts’ forecasts are that its earnings will rise by a very robust 9.5% a year to the end of 2027. It is this growth that ultimately powers any firm’s share price and dividends higher in the long term.
So, is the share price undervalued?
HSBC’s share price is still down around 2% from where it was before the H1 results release. This may indicate that a bargain is to be had here, and it may be more than a 2% discount.
This is because a stock’s price and value are different. Its value reflects underlying business fundamentals, while its price is whatever the market is willing to pay.
By far the best way I have found to assess any stock’s fundamental value is the discounted cash flow model. This identifies where any firm’s share price should be, based on cash flow forecasts for the underlying business.
It is also a valuation separate from its business peers, which means it is not subject to sectoral over-or undervaluations.
The DCF or HSBC shows its shares are 39% undervalued at their current price of £9.54.
Therefore, their fair value is £15.64.
Additionally positive in this context is the $3bn share buyback announced in the H1 results. This comes on top of the existing $3bn buyback programme announced earlier this year. Such operations tend to be supportive of share price gains.
The high dividend yield bonus
In 2024, HSBC paid a total dividend of 87 cents, fixed at a sterling equivalent of 65p. This generates a yield on the current £9.54 share price of 6.8%.
Analysts forecast that this year’s dividend will be 50.5p, as no special dividend is likely (it was 16p last year). Next year the projection is for 53.5p, and for 2027 it is 58.6p.
These would give respective yields during those three years of 5.3%, 5.6%, and 6.1%.
By comparison, the average dividend yield of the FTSE 100 is presently 3.5%. And for the ‘risk-free rate’ (the 10-year UK government bond) it is 4.5%.
Will I buy more of the stock?
I believe its strong earnings potential will drive the share price and dividend higher in the coming years.
This, combined with the very low share price valuation and the high dividend yield, means I will buy more of the shares very shortly.
