There has been a lot of nervousness in stock markets recently. Some investors worry about the potential for a stock market crash, while others reckon the FTSE 100 could be about to reach new highs. One corner of the investment world that has attracted attention in recent years is penny shares. But US penny stocks have seen trading activity tumble. What might that mean for penny shares on this side of the Atlantic?

Falling trading

The news comes from US watchdog FINRA, which reports that trading levels in unlisted US shares have fallen by 70% since activity peaked last year.

Such shares are a bit different to UK penny shares, which are listed on the stock market. But some of the dynamics behind lower activity levels could apply on both sides of the pond. Last year, the meme stock craze saw speculators frantically trade in and out of shares that in some cases they barely understood. Now many such speculators have lost interest in the market and stopped trading.

Speculation versus investment

As an investor with a long-term horizon rather than a speculator, I had no interest in being part of the meme stock craze. But I do hold some penny shares in my portfolio, including boohoo, Centrica, and Stagecoach. If investors lose interest in penny shares, could that lead to their prices crashing?

Stock markets depend on matching buyers with sellers. If the number of buyers falls, that can lead to share prices falling. But it does not always work like that. Sometimes, if demand from buyers weakens, shareholders just decide to hold onto their stocks rather than offering them for sale at a lower price. So, I do not see a penny stock crash as inevitable even if buyers decline in number.

Penny shares and value

A lot of people focus on the price of penny shares. That is understandable, as they are defined by their price. But price alone is never a reason to buy a share in my view. A share is a tiny sliver of a company. When I am buying shares, at any price, I am hoping to get more value in future than what I pay now.

To deliver that value, a company needs to have ways of generating profits. If it can do that at the right level and over a long period of time, I would likely see potential value in a share. So, although I may consider adding a penny share to my portfolio, my reason to do so would not be just because it trades in pennies. Instead, as with any other share, my reason would be that I felt the share offered me good value compared to its long-term potential.

How I would treat any penny share crash

That is why, if penny shares did crash, I would treat it the same way as a wider stock market crash.

I would look to see whether any companies I thought had strong future cash generation prospects were now available at a price I felt made them good value. If they did, I would consider adding them to my portfolio. Whether a penny share or any other kind of share, my approach is the same. I want to find high-quality companies trading at prices that offer me value.

Christopher Ruane owns shares in Centrica, Stagecoach and boohoo group. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Diversified commodity miner and marketing company Glencore (LSE: GLEN) has been benefiting from higher prices. Most metals and resources such as oil have been riding high lately and that has improved the cash flowing into Glencore’s business.

The improving situation is reflected in the share price. At 426p, it’s risen by just over 40% in the past year. But there could be more to come over an extended period.

Big in the growth area of nickel

One growth area within the firm’s operations is its well-established nickel business. The company has been optimising its nickel infrastructure for decades. And the complexity of the operation suggests to me there could be high barriers to entry for would-be competitors.

Meanwhile, around 70% of nickel production goes to making stainless steel. But there’s a growing demand for nickel in the electric vehicle (EV) industry and other sectors. Indeed, it’s the most important metal by mass in the lithium-ion battery cathodes used by EV manufacturers.

And the metal’s wide useage may not be surprising when we consider its properties. For example, nickel can be disinfected, it’s corrosion resistant, it’s strong at high and low temperatures, and it has excellent electrical and magnetic properties.

Glencore reckons nickel is everywhere in the modern world but we rarely know it. So it has a reputation as being a ‘hidden’ metal. But one of the important factors for Glencore is there’s “virtually no other metal that will do the same job as nickel”.

Another feature of the nickel industry is that recyling obsolete kit produces more useable nickel. And Glencore is ready to benefit from that angle of the industry as demand grows in the years ahead.

However, the commodity industry is known for its cyclicality and that adds risks for Glencore shareholders now. But the company’s forward-looking dividend yield is running above 6% for 2023. And that valuation tempts me, despite the uncertainties.

Well placed for long-term growth

I’m also keen on the long record of multi-year growth delivered by Computacenter (LSE: CCC). The company describes itself as an independent technology partner. And that means it provides structured solutions and resources for large corporate and public sector customers. Computacenter helps them select, deploy, and integrate digital technology to achieve their business goals. And, day to day, Computacenter maintains, supports, and manages information technology (IT) infrastructure and operations for its customers.

I’ve been impressed how the business has maintained its growth trajectory over many years. And that suggests to me the company is well placed in its markets. Indeed, January’s trading update and outlook statement is upbeat. And the firm said its product order backlog is at “an all-time high and considerably larger than a year ago.”

Meanwhile, City analysts expect earnings to come in essentially flat this year and the share price has been consolidating. I’m inclined to use the pause in momentum to buy some of the shares to hold for the long term.

There are no guarantees of a positive investment outcome, of course, because past performance is not always a good guide to the future. And with the share price near 2,746p, the forward-looking P/E ratio is just below 18 for 2022, which isn’t a bargain-basement valuation.

Nevertherless, I see this as a quality enterprise and would be willing to take on the risks of share ownership.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

FTSE 100 mining stock Rio Tinto (LSE: RIO) is trending today, not an easy feat I imagine during earnings season. Some of the biggest FTSE 100 companies are busy reporting their results these days, some of which have even seen big changes in share prices as a result. But I think Rio Tinto has managed to stand out because of its massive dividend yield of 13.5% for 2021, when special dividends are factored in. Who does not like an income stock with double-digit yields? I certainly do, which is why I bought its shares a while ago. And so far, so good. 

But what happens next? That is the all-important question, especially at a time when a huge upturn for miners might be a thing of the past. Specifically, I am interested in answers to two related questions. First, is the mining giant likely to grow my capital? And second, can it continue to pay similar dividends in the future or was this a one-off phenomenon?

Rio Tinto’s bumper results

To answer these, let us first consider its latest results. The company’s revenues grew by a strong 42% in 2021 and its net earnings are up by a huge 116%. I also like its 44% return on capital employed (ROCE), up from 27% last year, indicating rising efficiency. Iron ore is the biggest contributor to its earnings, towering over that earned from other key metals like aluminium and copper. It is good news that its production might just increase in 2022, according to Rio Tinto’s guidance. However, iron ore prices are lower than they were a year ago. Also, production costs are expected to rise, which could both squeeze profits. 

My outlook for the FTSE 100 stock

Because of this, I am only cautiously optimistic in my outlook for Rio Tinto. It is a resilient and profitable company, and that is unlikely to change. However, I am not sure if it can continue to significantly increase its earnings this year. That does not imply that its share price would suffer. In fact, I think there is a whole lot of upside to Rio Tinto. It has a price-to-earnings (P/E) ratio of 6.7 times, which makes it significantly undervalued compared to FTSE 100 peers. Glencore, for instance, has a P/E of 16 times. Of course, in the short term, things might be better for the latter, but I think this undervaluation highlights the fact that this might be a good time for me to buy Rio Tinto stock for the next three to five years as the economy strengthens. 

Rio Tinto stock’s dividend yields

To answer the second question, I think it is evident that if its earnings are not quite as robust in 2022 as they were last year, dividends could decline. However, I think it will still be a good dividend stock to hold. Over the past five years, its dividend yield has averaged 6.2%, not counting special dividends. This is not just higher than average yield, it even beats elevated inflation levels of 5%+. I intend to buy more of Rio Tinto stock before it runs up too much. 

Manika Premsingh owns Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This is a good time for FTSE 100 banks. After being held back during the pandemic, this cyclical sector is more than just bouncing back. It is posting bumper results. Like in the case of Barclays (LSE: BARC), which posted its full-year earnings update for 2021 earlier today. I have long been bullish on the banking set, and after considering the broad macro picture and their latest results, I am even more so. 

Barclays’ robust earnings

Let me elaborate. Barclays’ net earnings are up almost 275% from the year before at £7.2bn. Pre-tax investment banking profits have hit a new record. It has been helped by a credit impairment release. This reverses the charges set aside during the pandemic for fear of a rise in bad loans. Barclays’ dividends are also now at 6p per share, up significantly from 1p during 2020, as banks are free to set their dividends. The bank’s dividend yield is still low though, at 3%, even lower than the 3.5% seen for the FTSE 100 index as a whole.

Why so undervalued?

I am, however, optimistic that dividends could improve in 2022. That could be a nice addition to the potentially significant capital growth I expect from Barclays stock this year. After its latest results, the bank’s price-to-earnings (P/E) ratio is at a low 5.3 times, which makes it a hugely undervalued stock in my view. The FTSE 100 P/E stands at 16 times right now, which would be one indication of how low its priced.  It can be argued that banks have a low P/E because of limited growth potential. That is possible, but I still think that Barclays is undervalued. This is because even among its peers, it has the lowest earnings ratio. 

Bullish about Barclays stock

And the fact that its earnings are expected to increase in 2022 indicates that the case for a rally in the Barclays share price just became more convincing. No wonder then that its share price is popping today. When I checked last, this Wednesday afternoon, it was trading 3% higher than its last close. It is also the third biggest FTSE 100 gainer today so far. Also, I like that analysts are really bullish on it. Even the most pessimistic analysts expect a small increase in its share price this year, and the most optimistic ones actually see a 75% increase as per estimates compiled by the Financial Times. These could change according to evolving circumstances, of course, but they are indicative of the stock’s potential for now.  

What I’d do

Sounds like a fairytale investment, does it not? Well, what is one without some dragons to slay! Inflation, in particular, is a concern. It is true that the bank benefits from rising prices that result in rising interest rates as the economic recovery creates greater demand. But its costs are expected to rise too. Moreover, too much inflation is never good for growth and banks. So I’d look out for that. On balance though, Barclays stock look really good to me. I’d buy it now. 

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Key points

• For the three months to 31 December 2021, losses halved year-on-year
• Some countries, including Norway, are completely removing pandemic entry restrictions
• Passenger numbers and load factors are improving

As the world gradually reopens, airlines are beginning to fly more people between different countries. One such example is easyJet (LSE: EZJ), a low-cost carrier based in Luton, England. With passenger numbers increasing and financial results improving, I think this company could be an exciting investment for the long term. Should I be adding it to my portfolio? Let’s take a closer look.  

Improving conditions and the easyJet share price

A trading update for the three months to 31 December 2021 indicated an improved environment for easyJet. A year-on-year comparison reveals that losses halved from £432m to £213m. Furthermore, the number of passengers flown during this time was 64% of the figure from the same period in 2019. Indeed, the company recorded just 18% for this period in 2020.

In a similar vein, the trading update showed the load factor improved to 77%, up from 66% for the same period in 2020. Indeed, cash burn halved to £450m, year-on-year. The firm’s CEO Johan Lundgren stated that the business would be “returning to near 2019 levels” in the summer. If this turns out to be true, I think the easyJet share price could rise significantly.    

Furthermore, both Berenberg and Liberum have ‘buy’ ratings for the company, with target prices of 750p and 800p respectively. At the time of writing, the easyJet share price is 665p.  

A good recovery investment?

Many countries have started reopening their borders, with some removing pandemic restrictions altogether. Norway is one example of a country that has returned to normal conditions. Switzerland and Sweden have followed recently.

Furthermore, Spain relaxed its requirements for teenagers entering the country, who now require a negative test instead of a vaccination certificate. As more countries drop entry requirements, I think a domino effect could occur, leading to a much wider reopening. This should have a very positive impact on the easyJet share price.

It is worth noting, however, that any new pandemic variant could delay increased travel and spark trouble for the company. In addition, surging energy prices may lead to a rise in jet fuel prices for many airlines in the months ahead.

The firm has a competitive trailing price-to-earnings (P/E) ratio. It stands at 11.99 and this is low compared with both Wizz Air and Ryanair Holdings, that have ratios of 74.46 and 60.39 respectively. This may indicate that the easyJet share price is undervalued.

With more countries reopening, I’m optimistic about the company’s prospects. Recent results demonstrate the firm is going in the right direction, while the easyJet share price might be cheap compared to competitors. I will be buying shares for long-term growth following a catastrophic period for the travel industry. 

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Investing in UK dividend shares can be a lucrative source of passive income. Buying a range of such shares means that, even if one company unexpectedly cuts its dividend, hopefully I will still receive income from other holdings.

With £10,000 to invest, I would split it evenly across these five shares to target a yield of over 8%.

Risks and rewards

Will the housing market collapse? Will cigarette smoking keep falling? Those sorts of worries plague investors in companies such as housebuilder Persimmon and tobacco company Imperial Brands.

I think the worries are justified and they do pose a risk to future profits. But I also think that risk is built into the companies’ share prices already, as reflected in their high dividend yields. Persimmon, for example, is yielding 9.7% and Imperial offers 8%. Both companies are in the FTSE 100 and their yields are far above the average offered by their peers in the index.

There is a lot I like about the companies. Persimmon is a recognised name among homebuyers and has a disciplined financial model with high profit margins. Its most recent full-year results showed a net profit margin of 19%. Imperial is also a high margin business, thanks to the low manufacturing costs of cigarettes and pricing power offered by its portfolio of premium brands.

Financial services

I would also invest in two high-yielding companies that operate in different parts of the financial services sector.

First is asset manager M&G, currently offering a dividend yield of 8.4%. The company is well-established and has a sizeable client base. With assets under management and administration of £370bn, M&G is a huge business. That scale can help it make big profits, both now and in future. One concern I have is investors leaving its retail asset management arm over recent years. If that continues, profits could fall. But ongoing strength in M&G’s institutional business is a source of confidence.

I would also invest in insurer Direct Line. The insurance business model is fairly simple and Direct Line stays away from the sorts of exotic risks that can throw up sudden unexpected losses on a big scale. Events like the recent storms could still hurt profitability in any given year. But over the long term I think the company’s brand and underwriting expertise should help it attract and retain profitable business. With a dividend yield of 7.4%, I would tuck Direct Line in my income portfolio and hold it there.

High-yield trust

Lastly, I would put £2,000 into Income & Growth Venture Capital Trust. As the name suggests, it seeks to generate both income and capital growth by investing in a large portfolio of early stage companies. Most such companies are unlisted, but I can get exposure to them by buying Income & Growth shares. Some companies may fail, which could hurt the trust’s profits, but hopefully it will also pick some real winners.

The dividends tend to move around a lot, but the current yield is an attractive 9.6%.

UK dividend shares with average 8.6% yield

With an average yield of 8.6%, splitting my £10,000 evenly across these five shares would hopefully give me annual passive income of £862. I regard this portfolio as an attractive way to boost my passive income streams.

Christopher Ruane owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Key points

• Domestic parcel revenue was down 4.9% for the FY22 Q3, on a year-on-year basis
• The trailing P/E ratio is lower than two competitors
• In January 2022, the Omicron variant resulted in 15,000 absences

The Royal Mail Group (LSE: RMG) owns a number of instantly recognisable brands, including Royal Mail and Parcelforce Worldwide. As a postal and courier service, it operates throughout the UK. Postal volumes increased during the Covid-19 pandemic and, unsurprisingly, so did the company’s revenue. I’m therefore interested to find out where the Royal Mail share price is headed. Also, should I add this to my long-term portfolio? Let’s take a closer look. 

Recent results and the Royal Mail share price

The trading update for the three months to 31 December 2021 sheds some light on the company’s financial position. While revenue increased 17% compared to the same period in 2019, a year-on-year observation shows a decline of 2.4%. 

The same trend can be identified in the domestic parcel revenue and volume. Indeed, domestic parcel revenue increased 43.9% compared to the same three months in 2019, while the figure was down 4.9% on a year-on-year basis. Domestic parcel volume was up 33% and down 7% by the same time comparisons.

This suggests that the Royal Mail share price benefited from the increased requirement for courier services during the pandemic. As the world reopens, however, I’m sceptical about the company’s ability to maintain such high revenue and volume figures.

Also, the business is pursuing a cost cutting operation. It plans to reduce manager-level jobs by 700, at an initial cost of £70m. The company believes this will save around £40m per year.

A cheap growth stock?

Although recent results may indicate a decline, the firm’s trailing price-to-earnings (P/E) ratio is rather competitive at 4.93. This is lower than two competitors, PostNL and FedEx, that have trailing P/E ratios of 5.67 and 12.24, respectively. This may suggest that the Royal Mail share price is undervalued. Indeed, Barclays has a price target of 640p for the company. At the time of writing, it is trading at 397p.

Earnings-per-share (EPS) data is also strong. Between the 2017 and 2021 fiscal years, EPS increased from 44.1p to 52.1p. By my calculation, this results in a compounding annual EPS growth rate of 3.39%. This is both solid and consistent.  

Despite these strong historical results, the pandemic may still bring trouble for the company. In January 2022, the firm had about 15,000 staff absences from the Omicron variant. This equates to around 10% of the workforce. Any future variants could bring similar problems.

Although the Royal Mail share price may be cheap, I will not be buying this firm. The recent numbers on parcel revenue and volume look to be falling and I am concerned about this impact on the company. The future threat of variants could also have implications for the way the business delivers parcels and post.    

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

After recent turbulence in the stock market, some UK growth shares have fallen sharply. I see some buying opportunities for my portfolio. If I had a spare £300 at the moment, I would use it to buy more shares in two beaten down growth companies I already own.

S4 Capital

Last year, digital media agency holding group S4 Capital (LSE: SFOR) saw its share price soar 27%. In 2022, though, things have got off to a bad start. S4 shares have fallen 18%, meaning that over the past 12 months they only show a 5% gain.

I see that as a buying opportunity for my portfolio. S4 is a larger business than it was a year ago and I think its growth prospects are also more attractive. It plans to grow revenues and gross profits organically by 100% in just three years. On top of that, the highly acquisitive company will likely see bolt-on growth. It has been adding big clients as well as expanding its service offering.

UK growth shares I would buy now

Full-year results from S4 are due next month and they should give indications about how the business is doing. Fast growth has seen headcount balloon to over 8,000. The costs of managing such a large team could eat into profit margins. S4’s large exposure to tech clients such as Google parent Alphabet could mean revenues are hurt if the sector tightens its belt when it comes to spending.

But the rapid growth points to the fact that the S4 model clearly appeals to clients. It has a global team of top talent and is growing its lead on competitors when it comes to developing digital marketing offerings. I expect strong growth to lead the share price upwards again. I would gladly spend £150 on S4 Capital shares for my portfolio.

Renalytix

Kidney diagnostics specialist Renalytix (LSE: RENX) has had a very bumpy year, with its share price tumbling 59% in 12 months.

Some of that fall reflects risks I think could indeed be significant. The company’s revenue is small and there is no guarantee it will ever reach critical mass. The company is hoping to grow revenues by recruiting a big sales force. But that is costly and will eat into profits.

Despite the risks, I think there is a very interesting investment case at Renalytix. The market for kidney diagnosis is large and set to grow in future. Renalytix’s platform is already proving its worth to doctors, with a growing number of scientific studies to support it. The digital nature means it is scalable. So, while currently Renalytix is spending on large upfront costs like sales teams, over time hopefully the more installations Renalytix can achieve the better its profit margin will become. With a large, growing market size, a unique product, and a strategy to sell to large healthcare providers in the US, I think Renalytix could turn out to be a highly profitable business in future.

As the share price falls indicate, many investors continue to question the long-term prospects for Renalytix and how much money it will need to spend to build a profitable business at scale. But I continue to think the outlook is positive. I would happily spend £150 on Renalytix shares for my portfolio.

Christopher Ruane owns shares in Renalytix and S4 Capital. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet (A shares) and Alphabet (C shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Less than a year ago, in August 2021, I wrote an article on the FTSE 100 banking corporation HSBC (LSE: HSBA) with a question in the title. The question was whether its share price could be expected to go back up to 600p, which is around the level it was at when 2019 ended. It was trading a little lower in early 2020, but the pandemic really dragged it down. When I wrote the article referred to here, it was down to around 400p. 

Cautiously optimistic to completely bullish

I was cautiously optimistic about it, but did believe that it would take a while before it touched 600p again. Almost seven months down the line, turns out that I was right. The HSBC share price has indeed risen, but to 550p, which is still some way-off from its December 2019 level. The Evergrande fiasco in China (a big market for the bank) in August 2021, and the Omicron variant later in November, have quite likely held the stock back so far.

But this is only half the story. Later on last year, I turned bullish on the stock. Fears of a spread of Evergrande’s troubles subsided, the pandemic showed signs of significant improvement and the bank’s results were strong too. By that time, my sense was that its share price could double, based on its prospects and relative undervaluation. It has been four months since, and the HSBC share price has made rapid strides. It is up around 25% since. And I continue to believe that the stock can not only touch 600p now, it can surpass it.  

Positive outlook for the HSBC share price

And after its latest results, I think it is clear that the bank is well on its way to rising far more. For the full year 2021, it reported a 75% increase in net earnings from the year before. In the final quarter of the year, its earnings have almost doubled.

It has also decided to pay a second interim dividend. For 2021, its total dividend payout per share is at 18p at today’s exchange rate of the pound versus the US dollar. This translates into a dividend yield of 3.2%, which is among the better ones in the banking set. It is however, still lower than the FTSE 100 average of almost 3.5%. This implies that there are plenty of other FTSE 100 stocks with higher dividend yields. So clearly, this is not the big reason to buy it. But, it does add to the potential returns from the stock.

What I’d do

The HSBC share price could still be impacted by negative events, though. For instance, the Evergrande overhang is still visible. It says that “Uncertainty remains given recent developments in China’s commercial real estate sector…” and also that “inflationary pressures persist in many of our markets”. Interestingly, inflation is a positive for banks so long as growth is strong, since it results in higher interest rates. But it is also increases costs and might just hurt business if it goes out of hand too. On the whole, though, the bank’s outlook is positive. 

I am still quite bullish on the HSBC share price. I’d buy it in 2022, and before it rises too much.

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This week, it was the turn of the big FTSE 100 banks to report their 2021 results. As interest rates continue to rise, many analysts are getting bullish on the prospects for the sector. HSBC was first to report. The bank’s share price has long commanded a premium compared to its peers given the fact that a significant chunk of its revenue is accounted for in fast-growing Asian markets. But is it a good investment today?

A solid if not spectacular set of results

A near-zero interest rate environment across most developed economies hit HSBC’s revenue, which was down 2% at $49.5bn. However, as the world continued its recovery from Covid and the economic outlook improved, profit before tax increased 115% to $18.9bn. This was driven by a net release of expected credit losses (ECL), as the large number of anticipated business failures following the pandemic never materialised.

In HSBC’s largest business unit, wealth and personal banking, assets increased by 21%. Growth was particularly pronounced in Asia as a result of referrals from wholesale banking clients. A buoyant mortgage market was reflected in lending, which was up 6% on 2020.

The bank continues to pivot away from less profitable income streams. It recently exited US mass retail and its planned sale of France retail will be completed in 2022. As a result of such initiatives, its cost base has decreased by $3.3bn.

Meanwhile, it continues its growth agenda in Asia. Key acquisitions here have been AXA Singapore, L&T Investment Management (a fund house in India), as well as taking full ownership of HSBC Life China.

Cashing in on rising interest rates

Despite these improving headline numbers, the key driver of HSBC’s net interest income will always be interest rates. Recent rises in the UK will help but they still remain at historically low levels. At the moment, large rate hikes seem unlikely, particularly given the level of debt central governments carry on their balance sheets.

What also concerns me, is the cost structure of the bank under a regime of rising interest rates. Historically, it has had a problem on this front. As it continues its transformation journey and increases it exposure to high performing regions in Asia, its simplified structure should help it keep a lid on costs. But the sheer size and scope of the organisation means that progress has been slow and it is not at all clear what the ‘new’ bank will look like once the journey is complete.

A perennial problem for banks is determining the amount of cash to set aside for bad debts. As a result of the emerging Chinese commercial real estate market caused by Evergrande, it has been forced to increase its provisions on this front. Although HSBC having no direct exposure to developers in the so-called ‘red’ category provides some comfort, I think China remains the elephant in the room. If there was a property crash in China similar to 2008, then HSBC would be first in the firing line.

I bought shares in HSBC near the pandemic lows as they clearly had been oversold. With the announcement of a 67% increase in dividend payment, I am now sitting on an attractive yield. However, given all of the above, I will not be adding to my position.

Andrew Mackie owns shares in HSBC. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.