At first glance, it may seem silly to suggest that HSBC (LSE: HSBA) and Aviva (LSE: AV) would make the perfect pair. However, the two finance firms both have many attractive traits that complement each other.
For a start, HSBC is an Asia-focused bank, and the group is planning to increase its Asian presence over the next decade. At the same time, HSBC is retreating from some European markets and other emerging markets around the world.
On the other hand, Aviva is focused on growing its European presence but lacks a significant presence in Asia. Aviva’s business is growing rapidly within emerging markets like Poland and Turkey.
What’s more, both Aviva and HSBC are recovery plays. HSBC is still trying to cut costs and streamline its operations as Aviva simplifies its business to concentrate on cash generation.
Restructuring
According to initial figures, HSBC is planning to slash around 8,000 jobs in the UK and a further 16,000 positions outside the UK to reduce costs. The group is planning to cut its global headcount by 10% overall. Further, HSBC is looking to sell its subsidiaries in Brazil and Turkey while the UK banking subsidiary is to be ring-fenced or spun-off.
Overall, the group plans to cut approximately $5bn of annualised expenses over the next few years. At the same time, the bank will be investing in Asia, South East Asia in particular. Management is planning to expand HSBC’s asset management and insurance activities in the region.
So, HSBC could be a great play on Asia economic growth. Meanwhile, Aviva could be a great play on Europe’s aging population.
Play on Europe
As one of the UK’s largest pension and savings providers, Aviva has economies of scale few other insurers can achieve. Under the new CEO, Mark Wilson, it seems as if the group has one primary goal; to build a strongly performing European composite insurer with good cash generation can one day fund a lot of growth further afield.
The recent acquisition of Friends Life should only accelerate Aviva’s progress towards this goal.
Indeed, it’s estimated that Friends will boost Aviva’s cash flow by an additional £600m per annum. A sizable sum that should help reduce Aviva’s £2.8bn of internal debt owed by Aviva’s Life companies to the group’s General Insurance arm. Also, the extra cash flow, coupled with cost savings realized from the merger will Aviva to boost its dividend payout.
Aviva currently yields 3.7%, but City analysts believe that the company will hike the payout by 17% this year. Based on these forecasts the company’s shares will support a yield of 4.2% for full-year 2015. Further dividend growth is expected during 2016. Analysts expect Aviva to hike the payout another 17%, which should leave Aviva’s shares yielding 4.9%.
Income investment
HSBC is also an attractive income investment. The bank currently supports a dividend yield of 5.8%, and analysts believe that this yield figure is set to hit 6% next year. HSBC’s dividend payout is covered one-and-a-half times by earnings per share.
