Dr. Pasternak's Picks Among Foreign Banks

09/27/2017 5:00 am EST


Carla Pasternak

Editor, The Income Investor

In hunting for attractive foreign bank stocks, which offer a generous and sustainable income stream, we found two turnaround picks with promising growth prospects, suggests Dr. Carla Pasternak, editor of Dow Theory Letters' The Income Investor.

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Both are trading at prices that will let you lock in a robust dividend yield of more than 4%. Despite the ups and downs of earnings, they both have the cash flow to have grown their dividend every year for at least the last five years.

HSBC Holdings Plc (HSBC)

Founded in 1865, HSBC has about 5,000 branches in over 70 countries across the world. Asia still accounts for nearly half its revenue, with Europe contributing about 31% and North America most of the balance.


Revenue and earnings have been on the decline since 2012 as low interest rates shrunk profit margins and a weak economy reduced loan volumes.

However, in mid-2015 the bank began to streamline operations by divesting non-core assets and improving efficiencies through automation. Revenues are forecast to grow 5% in 2017, and expected earnings per ADS of $3.20 are up sharply from $0.33 per ADS in 2016.

The bank pays quarterly dividends in May, August, October, and February. The fourth interim dividend in February is generally about twice as much as the other three interim dividends.

For the past four quarters, dividends totaled $2.55 per ADS, giving a yield of 5.2%. That represents just under 80% of projected 2017 earnings. The dividend should qualify for the reduced dividend rate of 15%-20%, depending on your income.

Canadian Imperial Bank of Commerce (CM)

Founded in 1867 and popularly known as CIBC, this bank is the smallest of Canada's big five banks. The bulk of its assets and revenue are in Canada; it also operates in the Caribbean and has joint ventures with banks in the U.S. and Bermuda.

Despite an aggressive acquisition strategy, the bank has a healthy balance sheet. Earnings are forecast to rise about 7% this year to $8.73 per share, driven by acquisitions and higher interest rates in Canada.

Like all major Canadian banks, CIBC has a strong dividend growth track record. It has paid dividends every year since 1890, and payouts have grown an average 8% over the past three years alone.

Dividends are paid in Canadian dollars and automatically converted into U.S. dollars at the current conversion rate in a U.S. brokerage account. Quarterly dividends so far in 2017 were CAD$1.27 which annualizes to CAD$5.08. That gives the shares a yield of 4.8%.

The current dividend rate represents a sustainable 47% of 2016 earnings and leaves room for further dividend hikes. Dividends should qualify for the reduced dividend tax rate for U.S. investors.

A further benefit for U.S. investors is the strengthening Canadian dollar. The value of the dividends for U.S. investors is rising in tandem with the stronger Canadian currency.

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