Can HSBC Holdings Plc Outperform JPMorgan Chase & Co.?
If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100, FTSE 250 and the US stock market.
I'm going to use three key criteria -- value, income and growth -- to compare companies to their sector peers. I've included some US shares, as these provide UK investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding US shares in a UK dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.
Today, I'm going to take a look at British-Asian banking giant HSBC Holdings (LSE: HSBA) (NYSE: HBC.US) and America's largest bank, JPMorgan Chase & Co (LSE: JPM) (NYSE: JPM.US).
1. Value
The easiest way to lose money on shares is to pay too much for them -- so which share looks better value, HSBC, or JPMorgan?
Value | HSBC | JPMorgan |
|---|---|---|
Current price-to-earnings ratio (P/E) | 14.5 | 9.2 |
Forecast P/E | 10.9 | 8.8 |
Price-to-book ratio (P/B) | 1.1 | 0.9 |
Price-to-sales ratio (P/S) | 2.8 | 1.9 |
On the face of it, JPMorgan looks better value than HSBC, with a below-average P/E ratio and a price to book (P/B) ratio below one, indicating that the company's theoretical breakup value may be greater than its market capitalisation. In contrast, HSBC's current P/E and P/B ratios suggest it is fully valued at present.
2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do HSBC and JPMorgan compare in terms of income?
Value | HSBC | JPMorgan |
|---|---|---|
Current dividend yield | 4.3% | 2.5% |
5-year average historical yield | 4.5% | 2.1% |
5-year dividend average growth rate | -11.0% | -4.1% |
2013 forecast yield | 4.7% | 2.9% |
Most UK stocks offer a higher yield than their American counterparts, and HSBC is no exception, with a 5-year average yield that is more than twice that of JPMorgan. Although that gap is closing as the American banking sector recovers from the financial crisis, HSBC's 4.7% forecast yield is more than 50% higher than JPMorgan's forecast yield of 2.9%.
3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation, if they are to protect their market share and profit margins.
How do HSBC and JPMorgan shape up in terms of growth?
Value | HSBC | JPMorgan |
|---|---|---|
5-year earnings per share growth rate | -12.9% | -4.7% |
5-year revenue growth rate | -9.3% | 3.7% |
5-year share price return | -17.8% | 11.1% |
JPMorgan looks the stronger of the two banks in terms of recent growth, but last year saw both banks take knocks to their previously untarnished reputations. In JPMorgan's case, London-based rogue trader Bruno Iksil -- who became known as the London Whale -- triggered a $5.8 billion loss for the US bank. Meanwhile, HSBC set a new record for banking fines, when it agreed to pay out $1.9 billion to US and UK regulators to settle money laundering charges relating to the Mexican drugs trade.
Although both banks could afford the losses, they did make a dent in last year's profits, contributing to a 20% drop in earnings per share for HSBC, and reducing JPMorgan's otherwise impressive earnings growth.
Should you buy HSBC or JPMorgan?
As a UK investor with a focus on dividend income, my choice would be HSBC -- and although its shares look quite fully valued at present, the bank's 4.7% forecast dividend yield is much more attractive than JPMorgan's 2.9% forecast yield, and in my view is enough to justify HSBC's current share price.
If I was looking for a value investment, I would choose JPMorgan. The American bank's current share price gives it a price to book ratio (P/B) of less than one and a trailing P/E ratio of just 9, well below the US and UK market averages, providing the potential for a re-rating as investors regain confidence in the bank and its CEO, Jamie Dimon.
2013's top income stock?
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