Investors in the one of the most popular UK equity income stocks HSBC should expect further pain as the global firm is forced to cut its dividend, according to star fund manager Neil Woodford.
While Woodford did previously own HSBC as a 2 per cent positon in his £8bn CF Woodford Equity Income fund, he quickly jettisoned the stock over fear that it was set for a difficult period.
However, many other fund managers apparently disagree with nearly one in two of funds in the 83-strong sector counting the company as a top 10 holding, a recent FE Trustnet study found, making it one of the most popular top positions amongst funds in the sector as the table below shows.
Source: FE Analytics
Woodford sold out of HSBC in August 2014 after just two months of holding it, a move unusual for the manager who has held some stocks for more than decade and tends to opt a buy-and-hold approach.
“I sold HSBC because I became less convinced about the fundamental value drivers of that business. I was also concerned about fine inflation,” Woodford (pictured) said.
“This wasn’t the only reason. We were worried about China. I sold HSBC because I became less convinced about the fundamental value drivers of that business. The business is very challenged, not least of all by extraordinary monetary policy which crushes their margins. Since then I have become even more bearish on China.”
Woodford has warned, on a number of occasions, that there are likely to be wide spread dividend cuts in the concentrated UK market.
“The market yield has been distorted by the fact that prices have fallen and dividends have not yet been cut, but they will and that is the next chapter in this rather difficult market environment.”
He says HSBC, which is the second largest listed company in the UK by market capitalisation, is one investors should be wary of in particular.
“HSBC's Q4 numbers [for 2015] were abysmal and they are essentially earning about a 7 per cent return on equity and paying out an 8 per cent dividend. At the same they are having to build up their capital resources. I’m struggling to see how that is sustainable.”
HSBC has lost nearly 30 per cent since the FTSE 100’s high last April, more than double the index’s fall.
Performance of stock and index since 27 April 2015
Source: FE Analytics
This has opened up a buying opportunity for income seeking investors, says Graham Spooner, investment research analyst at the Share Centre, in contrast to Woodford.
“The bank’s Asia pivot is proving to be more hindrance than help, but a multiple of less than ten times earnings will likely draw in many, on the basis that the worst may be behind it.”
HSBC announced this week a net annual profit fall of 1.2 per cent to $13.52bn, with a pre-tax loss of $858m in the fourth quarter of 2015. These results were below expectations and therefore shocked the market with analysts forecasting the period to be profitable.
“The company said it would raise its total annual dividend to $0.51 per share from $0.50. This news came as a relief to hard pressed income investors in the sector. Income seekers in the banking sector have been hit hard in recent years,” he said.
“Investors interested in the sector should note that HSBC has remained a significant payer and although progress may continue to be slow in the face of many challenges, the shares could be a better option than other banks. HSBC is viewed as being more conservatively managed with a superior balance sheet and deposits.”
“In the present climate we would recommend the shares as a ‘buy’ for medium risk income seekers. However, we would suggest that longer term investors build a holding over time, as there is no quick fix for the sector.”
Last year was another strong year for Woodford’s open-ended fund. The CF Woodford Equity Income was a top decile performer last year, finishing sixth best out of the all the funds in the IA UK Equity Income sector with a return of 15.9 per cent, compared to a sector average of 6.2 per cent and a small gain in the FTSE All Share of 0.98 per cent.
This performance for the fund 2015 was enough to keep the portfolio at the top of the sector overall since it launched in June 2014, a positon it has consistently held for most of this period. Since launch, the fund has returned 16.52 per cent compared to an IA UK Equity Income sector average of 1.03 per cent a fall in the FTSE All Share of 5.51 per cent.
Performance of fund, sector and index since launch
Source: FE Analytics
So far this year it has also performed well relatively against its peers and the index in the down market.
CF Woodford Equity Income has a clean ongoing charges figure of 0.75 per cent and a current yield of 3.55 per cent.
