Two dividend income champions at bargain prices

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YOU may have noticed, as the FTSE 100 bounces around all-time highs, that it’s becoming increasingly difficult for investors to find attractively priced shares.

With interest rates at rock bottom levels, investors around the globe have scrambled to own shares in blue-chip dividend-paying enterprises, driving up share prices,

However, I can think of at least two first-class blue-chips that haven’t gotten caught up in this frenzy.

Two of the FTSE 100’s largest constituents, HSBC and GlaxoSmithKline are currently trading at rock-bottom levels in my view, giving investors an opportunity that could be too good to miss.

These companies aren’t without their problems in 2014 though, and both HSBC and Glaxo are trading near their lowest levels of the year for good reason. The recent headlines about Glaxo’s China bribery scandal being a prime example, putting most investors off the shares.

Investors are concerned that Glaxo’s problems within China may spread to some of the company’s other markets too. There company is under pressure from the Serious Fraud Office investigation here in the UK, while allegations rumble on in Poland and the Middle East.

Meanwhile, investors are worried about global bank HSBC’s exposure to Asia, China in particular. With the number of corporate debt defaults rising nearly every day within China, many analysts are now warning of a regional credit crunch. HSBC is likely to be seriously affected by an Asian credit crunch and the damage to the bank could potentially be severe.

Nevertheless, HSBC’s management is not worried about the prospect of Chinese credit crunch. Indeed, management has been proactive in reducing the bank’s exposure to risky debt and assets. Additionally, Glaxo’s underlying business remains strong and the company has a solid pipeline of more than 40 treatments in late-stage development.

These are two truly global businesses, capable of withstanding the storms that have battered their respective share prices in recent months. And after recent declines, both Glaxo and HSBC offer impressive dividend yields, which you would be hard pressed to find elsewhere.

Indeed, at present levels Glaxo supports a dividend yield of five per cent, potentially rising to 5.3 per cent by 2015. The payout is currently covered one-and-a-half times by earnings per share, which is acceptable, for a company that generates as much cash as Glaxo. What’s more, after Glaxo’s recent deal with Novartis, which netted the company £4bn, investors are set for a one-off payout via of 80p per share - quite a windfall.

HSBC on the other hand currently offers a 4.8 per cent yield, which is expected to hit 5.5 per cent by 2015. Banking, done correctly, can be a highly lucrative business - and few institutions boast the reach and reputation of HSBC.

It’s not just hefty dividend yields that make HSBC and Glaxo attractive, both companies are also trading at attractive valuation multiples - it could be said that they’re on offer at a “cheap” price.

Glaxo for example currently trades at a historic P/E of 13.8, inexpensive compared to its biotechnology sector peers, which trade at an average historic P/E of 17. Moreover, HSBC currently trades at a historic P/E of 12.1 and a forward P/E of 11.1 as earnings per share are slated to grow by 10 per cent this year.

Both HSBC and Glaxo have the support of City of London veteran and guru Neil Woodford, who has bought large chunks of the two companies for his new income fund. And it’s easy to see why, with yields in excess of five per cent predicted, both Glaxo and HSBC could have a place in anyone’s income portfolio.

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