Is HSBC’s Dividend Cancellation a Buying Opportunity?

HSBC Holdings plc (SEHK: 5) did something that it has never done before in 74 years. On 31 March 2020, the bank cancelled its dividend.

This left many income investors, who rely on HSBC’s dividends, adrift.

Given the investment saying “buy when there’s blood on the streets”, is the dividend cancellation a buying opportunity?

Fewer dividend investors

The stock market prizes consistency. All other things being equal, a company that has a history of maintaining a stable or rising dividend will get a higher valuation than a company that has an inconsistent dividend.

While HSBC’s dividend has fluctuated before, the bank has been consistent in that it has never cancelled its dividend.

Due to the cancellation, the bank isn’t consistent in paying the dividend anymore. Although it wasn’t really HSBC’s fault (given it was forced to by the UK regulator, the PRA), there is no guarantee something similar won’t happen again.

This means some dividend investors won’t be coming back due to the lack of consistency. As a result, HSBC might not have as high of a valuation as it could have in the future.

HSBC will have more capital

In 2019, HSBC paid shareholders US$4.2 billion in dividends. Due to HSBC having more capital, the odds of the bank needing to go to the government for a bailout has decreased.

Buying opportunity?

Because the macro environment will recover due to government stimulus, I think HSBC’s stock price will eventually recover all of their Covid-19 losses.

I don’t think things will get so bad that HSBC will need to go to the government for a bailout that increases the share count (although I might be wrong). It will also very likely reinstate the dividend at some point, although potentially not all at once.

HSBC has a lot of growth in Asia left and the company’s Asia pivot could work. The fact that Ping An Insurance Group Co of China (SEHK: 2318) is a leading shareholder in HSBC is an indication that the bank has a lot of potential.

If an investor were limited only to HSBC and comparable super-sized Asian-focused banks, I think it’s a buying opportunity. This could be the case for many investors due to sector limitations and diversification requirements.

If an investor can invest in other stocks, however, I don’t know if investing in HSBC is better than investing in another leading financial stock.

If the bank’s share price rises, many leading Asian-focused financial stocks will also increase. HSBC isn’t a stock guaranteed to generate good returns without solid execution.

Past management mistakes

In the past, HSBC previous management hadn’t executed well and the stock has suffered because of it.

Previous management made bad capital allocation decisions and as a result, the bank hasn’t been well positioned in profitable areas.

In terms of total returns, which includes dividends and stock splits, its return has been negative since the beginning of 2000. That’s around two decades of lost returns.

For the future, HSBC will not only need to do a successful restructuring, but also it will need to successfully compete against fintech giants such as Ant Financial and Tencent’s WePay to really fundamentally improve. That’s going to take a lot of execution.

There are other stocks with financial exposure out there that don’t require as much execution to likely generate good returns.

Arguably these include Alibaba Group (NYSE: BABA) (SEHK: 9988), Tencent Holdings Ltd (SEHK: 700), or AIA Group Ltd (SEHK: 1299).

Foolish takeaway

I think the dividend cancellation presents a buying opportunity for investors who can only buy large Asian-focused banks.

For others, though, there might be better buys out there if you’re an investor with more flexibility.