The Banco Santander (LSE:BNC) share price looks like a brilliant bargain to me right now.
For 2023 the bank trades on a forward price-to-earnings (P/E) ratio of just 5.5 times. It also carries mighty dividend yields of 5.2% and 6.4% for 2023 and 2024, respectively.
As someone who’s chasing big dividend income right now those yields look especially attractive. They suggest that £10,000 invested in Santander shares today could make me passive income of £520 this year and £640 in 2024.
But how realistic are current dividend forecasts? And should I buy the stock for my portfolio today?
Strong forecasts
Last year the company paid a total dividend of 12 euro cents per share, up 20% year on year. City analysts are predicting another juicy payout boost in 2023, to 17 cents. A 20-cent reward is tipped for next year too.
When one looks at expected earnings these forecasts look rock solid. Dividend cover sits at 3.4 times and 3.2 times for 2023 and 2024, respectively. A reading of 2 times and above provides a wide margin of safety for investors.
Santander also healthy capital reserves it could use to pay large dividends should profits come under pressure. Its CET1 capital ratio stood at a healthy 12.2% as of March.
It’s worth noting that Santander’s balance sheet isn’t as robust as many other European banks, though. And with the business remaining committed to global expansion the amount it has to pay in dividends could come under pressure. Last summer it famously failed to acquire Banco Nacional de México because it didn’t have the cash.
But recent steps indicate the importance the bank places on returning large amounts of cash to investors. It has recently raised the payout ratio to 50% from 40%, in fact. It intends to achieve this via a blend of dividends and share buybacks.
I’d buy the shares
On balance, I believe there’s a great chance Santander shares will meet dividend forecasts through to 2024. Barring another meltdown in the world economy, I’m expecting shareholder payouts to keep growing further out too.
I’m mainly excited about the possibility of stunning profits growth in its Latin American marketplace. Low financial product penetration there and rising personal wealth means that bank revenues could soar over the long term.
Both loans and deposits there increased by double-digit percentages (12% and 10%, respectively) in the first quarter. And as I mentioned, the bank is planning further expansion to bolster profits over the next decade.
I’m concerned about mounting bad loans at the business. Pre-tax profit dropped 2% in Q1, to €4.1bn, as it chalked up another €2.9bn worth of loan-loss provisions. As the global economy splutters these could keep rising.
But I don’t think dividend forecasts through to 2024 are under threat from this. I’ll be looking to add Santander shares to my portfolio when I next have spare cash to invest.
