HSBC Holdings plc (ADR) (NYSE:HSBC) has hit a crossroads. Like many competitors such as Royal Bank of Scotland Group PLC (NYSE:RBS), Barclays PLC (ADR) (NYSE:BCS), Citigroup Inc (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM), the London-based bank has yet to see HSBC stock return to the highs achieved in 2008.
In the past decade, HSBC has faced declining revenues and profits in most years as it experienced a company restructuring. Now as the company transitions to a new CEO, investors will see if the turnaround for HSBC that had begun under old CEO Stuart Gulliver will continue under the leadership of John Flint.
Earnings Miss and HSBC
The company reported a Q4 2017 loss of $274 million, up from $4.4 billion loss in 4Q 2016. For all of 2017, the company earned $9.7 billion (48 cents per share), a considerable improvement from the $1.3 billion (7 cents per share) seen in 2016. Still, analysts had expected higher profits for the year as well as a net profit in Q4.
The company blamed the highly-publicized collapse of U.K. construction company Carillon PLC and South Africa-based Steinhoff International Holdings PV as the reasons for the earnings miss. HSBC took a $1.3 billion write-down as a result. The HSBC stock price fell by around 3.4% during the trading day following the announcement.
Earnings per share (EPS) had fallen for most of Gulliver’s tenure. He took the CEO job in 2011. His time was marked by a restructuring that saw HSBC pull out of several countries. The process hit a low point in 2012.
At that time, the company agreed to pay a $1.9 billion fine for allowing drug traffickers to conduct money transfers within the U.S. financial system. Profits bottomed in 2016, falling to only 7 cents per share after the company had earned 64 cents per share in 2015.
The Worst Is Over for HSBC Stock
Still, it looks as if Flint will inherit a much stronger company than his predecessor received. HSBC has risen 17% from the time Gulliver took over and 70% in the last 24 months.
Further, forecast profit growth appears robust. Despite the 2017 earnings miss, analyst forecast double-digit annual profit growth for the rest of the decade. Amid the 2016 decline in profits, the price-to-earnings (PE) ratio rose to over 38.
However, with recovering profits, the company has a forward PE of 14.4. This forward PE more closely reflects levels seen in prior years.
Also, despite seeing its first dividend cut since 2009, dividend income looks favorable to new buyers. The annual dividend now pays $2 per share, amounting to a 3.8% dividend yield. While HSBC is not a dividend aristocrat, the dividend has risen in most years.
With increasing profits, investors can likely expect increases starting next year, the time when the company typically pays a higher dividend than the 50 cents per share in other quarters.
Although the recovery of HSBC stock hit a bump with the CEO change and the earnings miss, the company is well-positioned to grow profits and benefit shareholders. HSBC missed earnings due to a $1.3 billion write-down from the failure of two high-profile clients.
The Bottom Line on HSBC Stock
Even with the quarterly loss, annual profits grew more than six-fold from the low levels seen in 2016. Now, as Gulliver hands the baton to incoming CEO Flint, the company is positioned to grow earnings by double-digits for at least the next two years.
With the earnings and dividend increasing and the pain of the financial crisis and subsequent restructuring behind it, now might be the time where HSBC stock finally regains and surpasses its 2008 highs.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
