I used to be wary of Santander (LSE: BNC), because of its somewhat weird (to my mind) approach to dividends.
The bank used to pay dividends way in excess of earnings, and got away with it because a sizeable proportion of its Spanish shareholders used to take scrip instead of cash — but that was just diluting the value of the shares, and I saw no sense in it.
But since Ana Botín took the helm from her late father in 2014, the bank has moved to a more conventional approach and slashed its dividends to amounts sustainable from earnings. Forecast yields are now in the 4.1% to 4.4% range, and more than twice covered by earnings.
Strong start to 2018
And after viewing the latest results from Europe’s largest bank by market capitalisation, I’m convinced that its shares are looking good value now, and could beat the best of the FTSE 100‘s banks over the next year or two.
Santander posted an impressive set of first-quarter figures Tuesday, headlined by a 10% rise in profits for the period, to €2,054m. Excluding currency movements, the constant-euro equivalent soared by 22%, buoyed by strong growth in Brazil, Spain and Mexico and by an improving performance in the US.
Business in the UK didn’t do so well, with bad loans and increased regulatory costs adding to the financial burden, but to me that highlights what is ultimately Santander’s key strength — its global reach. But it does come with two edges.
When the rest of us were in the grip of the financial crisis, Santander had the likes of the upcoming economy of Brazil to help ameliorate the pain — though that country’s more recent slowdown subsequently acted as a bit of a drag. Still, Brazil is coming good again, with a 7% rise in attributable profit to €677m and loans growing faster than the market average.
And a turnaround in the USA is very welcome. A 2014 dividend payment that was in violation of American stress test restrictions led to a ban on further redistribution of cash, but that was lifted in late 2017, which the bank sees as being a turning point.
In its home market of Spain, a 26% rise took profit to €455m, with Santander’s acquisition of failing rival Banco Popular for just €1 apparently paying off as its integration proceeds on schedule.
Strengthening recovery
The share price plummeted from the latter half of 2014, reaching a five-year low in February 2016. But since then, we’ve been seeing a serious improvement in sentiment as the recovery has gathered momentum. With the shares trading back above the 470p level, we’re actually looking at a pretty much flat five-year performance.
That might seem disappointing compared to the FTSE 100’s 14% growth, but five years of decent dividends have provided an overall return of better than 30%. And I reckon we could be in for a Footsie-beating performance in the next few years.
At today’s price levels, predictions suggest a forward P/E multiple of approximately 10.8, and I reckon we could see an uprating of forecasts in the light of these Q1 figures — and the mooted 9% rise in EPS for the year could turn out even better.
The 11% boost to earnings pencilled in for 2019 would drop that ratio to only 9.7 — and we still have dividend yields in excess of 4% to look forward to.
