The Banco Santander (LSE: BNC) share price has dropped 8% in 2022. Based on current dividend forecasts, this slump means its forward dividend yield sits at 5.6%.
This figure beats the corresponding readings for most other London Stock Exchange-listed banks. Lloyds, HSBC and Barclays, for example, yield 5.3%, 5.2% and 4.6%, respectively.
And things get even better at Santander for 2023. For next year it yields a whopping 6.7%.
But how realistic do these projections look? And should I buy the Spanish bank for my portfolio today?
Dividend cover
Dividends at Santander took a beating following the onset of Covid-19. They rose again in 2021, however. And City analysts expect them to keep increasing, despite the uncertain economic outlook.
Forecasters predict a full-year payout of 15 euro cents per share in 2022. That’s up from last year. And for next year a 17-cent reward is expected.
The chances of Santander at least meeting these forecasts look very good too. Predicted dividends are covered between 3.1 times and 3.6 times for the next two years.
A reading of two times and above provides a wide margin of safety for investors.
Balance sheet
The bank also has a rock-solid balance sheet to help it pay these handsome predicted dividends. Its common equity tier 1 (CET1) capital ratio improved to 12.1% as of September.
Santander’s shareholder distribution policy is to pay out 40% of underlying profit in the form of dividends and share buybacks. Its strong capital position provided the backbone for it to lift the interim dividend 20% and to launch a €979m share buyback programme.
Red lights
Banking stocks have benefited from a steady rise in interest rates this year. Higher rates create a larger margin between what banks can offer to savers and to borrowers.
This is a big reason why Santander’s underlying attributable profit soared 15% between January and September.
The worry, however, is that rates are tipped to start falling next year as inflationary pressures recede, reducing this boost to profits.
On top of this, key economic data suggests that a sharp economic cooldown could be on the horizon.
And in September the World Bank cautioned that “the world may be edging toward a global recession in 2023 and a string of financial crises in emerging market and developing economies that would do them lasting harm.”
In this scenario banks could witness a sharp rise in bad loans and stagnating (or even falling) revenues.
A top value stock
But I believe these dangers are reflected in Santander’s ultra-low share price. Today it trades on a forward price-to-earnings (P/E) ratio of just 4.8 times.
And as I explained above, the bank should have plenty of flexibility to pay big dividends even if profits disappoint. If I had the cash to spare, I’d buy the bank today for its excellent value for money. And I’d look to hold it for years because of its vast exposure to fast-growing Latin economies.
