Is HSBC A DRIP Share For The Long Term?

Published in Company Comment on 10 December 2012

HSBC (LSE:HSBA) is one of the UK market's biggest companies. But how have long-term investors fared?

Some of the biggest companies in the FTSE 100 (UKX) run schemes where investors can take dividends in the form of new shares instead of cash. This is known as a Dividend Reinvestment Plan (DRIP), or 'scrip' dividends.

If the company in question pays a large and increasing dividend, such reinvestment can quickly compound the size of your shareholding higher.

Using dividend data on HSBC (LSE: HSBA), you can see how the income produced by this titan bank has made dedicated shareholders richer.

Shares ownedDividend yearDividend per share (p)Shares purchased by DRIP schemeNew holding
1,000200334.5401,040
1,040200435.4421,082
1,082200540.3461,128
1,128200641.9501,178
1,178200745.1611,239
1,239200838.3301*1,540
1,540200921.3481,588
1,588201022.7551,643
1,643201126.0771,720
1,7202012**16.9491,769

* assuming rights issue was passed, rights were sold and invested in shares

** only three of four dividend payments included

My figures are based on someone that owned 1,000 HSBC shares 10 years ago. Here is how dividend reinvestment has rewarded the company's investors.

Just over 10 years ago, shares in HSBC were 807p each. If an investor at the time bought 1,000 shares and kept reinvesting the dividends, they would today own 1,769 shares in the bank. Using today's share price, an initial outlay of £8,070 would now be worth £11,375.

With $0.44 of dividends expected for 2012, that initial £8,070 investment is expected to yield £477 in dividends this year.

The HSBC story demonstrates what can happen to a long-term DRIP investment when the dividend is cut. HSBC cut its payout in 2008 and again in 2009. The result was that the 2010 payout was less than half of the 2006 figure. Although HSBC fared better than most other banks in the financial crisis, returns for long-term investors were badly damaged.

There are some grounds for optimism. On a forward price-to-earnings ratio if 11.5, HSBC is currently undervalued compared with the average FTSE 100 share. Although the dividend was cut during the financial crisis, the resilience that HSBC has since demonstrated makes me think a much higher rating is deserved. After all, if HSBC was able to trade profitably throughout the credit crunch, what would it take to force the bank into reporting a loss?

HSBC is forecast to report a small decline in profits for 2012. This is expected to be followed by a 14.3% rise in 2013. The dividend is forecast to rise for two successive years. An increase of 5.2% is expected for 2012, followed by a 10.1% increase in 2013.

I believe that the market will begin re-rating bank shares as they put the crisis behind them. If I am correct, then HSBC looks ripe for an upgrade.

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> David does not own shares in HSBC.

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Comments

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HousingBear999 10 Dec 2012 , 5:58pm

Just to clarify, isn't a "scrip" dividend (mentioned towards the top) a bit different to a DRIP (Dividend Reinvestment Programme) - the latter being a programme by which shareholders can (hopefully for the longer term) elect to keep having their dividends reinvested, whereas a scrip is taken more to mean a scrip issue by a company - at which point (unlike the DRIP) the number of shares being acquired is normally known in advance (i.e. not determined by the share price, unlike a DRIP) and also there aren't dealing costs often (unlike a DRIP).

The bigger differences are that a scrip is a once-off (or twice-off etc), at the company's behest, rather than a continuous programme set up by a shareholder (if offered by big issuers like HSBC) at the shareholder's behest.

breelander 11 Dec 2012 , 3:43am

Just to clarify, isn't a "scrip" dividend (mentioned towards the top) a bit different to a DRIP (Dividend Reinvestment Programme)

Yes, there are two types of plan, SCRIP where new shares are created and issued to you instead of cash, and DRIP where your dividend is used to buy shares for you.

A company can only offer one type of plan through its Registrar, not both.

Both types are taken up by the shareholder by filling in a Mandate, which remains in force for all subsequent dividends until the shareholder cancels it or the plan is revoked by the company.

There are two types of Dividend Re-Investment plan:
DRIP; where shares are bought on your behalf, and;
SCRIP; where the shares are newly created/issued per dividend.
....
Please note:
DRIP or SCRIP options can be withdrawn by the client company at anytime.
When this takes place, any existing instruction you’ve given us - to pay your cash dividends to a bank, building society or third party - will then be re-applied as default.

https://help.shareview.co.uk/4/Help/default/en/Shareholder/Pages/ReinvestDividends.aspx

rsclee 10 Sep 2013 , 11:08pm

I am a novice in the domain of shareholdings - "The Motley Fool" could be of immense help to me. My query relates to my current role as trustee of my mother's estate.
She was a shareholder in HSBC, and had registered for DRIP. This was revoked when the registry was informed of her death. Now, I have been formally registered as the authorised representative.

Queries :
(1) Can I ask for the DRIP to be re-instated?
(2) If not, am I to expect only cheques in the future to cover UNissued amounts from dividends (ie. no possibility of receiving more share certificates for an estate holding)?
(3) Is there a time limit to when the Estate has to sell the shares (ie. dictated by security trading governance)?

Many thanks for any help.

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