Banco Santander SA And Vodafone Group plc: A Match Made In Heaven?

Banco Santander SA (LON: BNC) and Vodafone Group plc (LON: VOD) could be the perfect partnership for your portfolio.

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Emerging markets tend to grow faster than developed economies. But picking stocks to benefit from emerging market growth can be a risky business. So, the best approach is to pick companies with exposure to both developed and emerging markets, allowing you to benefit from the best of both worlds.

With this in mind, Santander (LSE: BNC) and Vodafone (LSE: VOD) are two perfect picks for this situation. The two companies have a broad and varied exposure to emerging markets, as a well as an established presence within multiple developed markets.

Europe’s largest

Santander is one of Europe’s largest banks but the company generates the majority of its gross income within Brazil, South America’s largest economy. Santander is Brazil’s third largest lender with a 10% share of the country’s loan market. The USA, Mexico, Poland and UK are also key growth regions for Santander.

In most of these markets, the volume of loans made by Santander is expanding at a double-digit rate. So, Santander is benefiting from both emerging and developed market growth.

Moreover, management is targeting a mid-teens return on tangible equity — a key measure of bank profitability — by 2017. In comparison, many of Santander’s peers are targeting a RoTE in the low teens over the next few years. 

As a result of these profit targets and Santander’s exposure to growth markets, City analysts expect the bank’s earnings per share to expand 15% this year, followed by growth of 13% during 2016. 

Further, the bank is currently trading at a forward P/E of 12, which looks cheap compared to analysts’ growth projections. Unfortunately, Santander cut its dividend payout earlier this year, although the bank still supports a yield of 3.5%. The payout is now covered twice by earnings per share. 

Emerging exposure

While many analysts are concentrating on Vodafone’s stagnating European sales, the company is surging ahead in developing markets such as India and South Africa.

For example, the company recently agreed to pay $4.2bn to extend its network in India, a market in which Vodafone’s revenue expanded by 17.7% during the fourth quarter of last year.

The company closed the quarter with 178.7m customers within India — that’s nearly half of the group’s overall customer base. Outside of India, Vodafone’s African arm, Vodacom, which operates across Southern Africa, reported a 15.6% increase in its active customer base during 2014 to just under 60m users. Vodacom’s key markets include South Africa, Tanzania, Angola, Cameroon and Zambia, among others.

Meanwhile, within Europe Vodafone is making progress with its Project Spring programme to revitalise the group’s European infrastructure. Vodafone’s European 4G coverage jumped to 65% during 2014, and further progress is expected over the next year.

All in all, Vodafone is a great play on emerging market growth and a European economic recovery. What’s more, the company’s dividend yield of 4.9% is one of the best on the market.

Dividend champions

Overall, Santander and Vodafone make the perfect partnership due to their emerging market exposure, projected growth and attractive dividend yields.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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