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Is It Still Safe To Buy Banco Santander S.A.?

I’m always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market has been overheating. 

So right now I’m analysing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today’s uncertain economy. 

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Today I’m looking at international banking giant Banco Santander S.A. (LSE: BNC) (NYSE: SAN.US) to determine whether the shares are still safe to buy at 426p.

So, how’s business going?

Santander fell out of favour with investors earlier this year when the company reported its earnings had fallen 73% during 2012. 

However, it appears that the bank is well on the way to recovery and, after an impressive first quarter, it looks as if Santander’s earnings are in line to more than double this year. 

In addition, it would appear that Santander is coming to an end of a long period of restructuring after the 2008 credit crisis. Indeed, during the first quarter of this year, Santander’s loan-to-deposit ratio hit an all-time low of 109% and the bank’s Basel III capital ratio is on target to be around 12% at the end of 2013. 

Moreover, Santander’s provisions for non-performing loans recently reached a one-and-a-half year low — highlighting good improvements within the bank’s loan book.

Expected growth

As I have written above, it appears that Santander is in line to return to growth year and many City analysts agree. City forecasts currently predict earnings of €0.49 per share for this year (113% growth) and €0.60 for 2014. 

Shareholder returns

Santander’s dividend yield is currently 9.6% — larger than that of its peers in the banking sector, which currently offer an average dividend yield of 3.4%. 

However, at present the Spanish bank’s dividend payout is not wholly covered by earnings and some investors are anxious about the payout being cut in order to preserve cash.

Still, City analysts currently remain upbeat and forecast only a 9% reduction in the payout over the next two years. 

Valuation

Santander trades at a historic P/E ratio of around 21, while its peers trade at an average historic P/E of around 18. 

Having said that, based on current City estimates, I believe the bank is trading at a forward P/E ratio of around 10.

Foolish summary

Overall, Santander is forecast to return to growth this year and the bank is working hard to strengthen its balance sheet and reduce credit risks. 

Additionally, the firm offers a dividend yield that is three times greater than that of its peers, and on a forward basis, the bank appears to be cheaper than its sector peers. 

So, all in all, I believe that Santander still looks safe to buy at 426p.

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In the meantime, please stay tuned for my next FTSE 100 verdict 

> Rupert does not own any share mentioned in this article.

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