Why Banco Santander SA Should Be A Candidate For Your 2014 ISA

santanderWhen we Brits think of investing in banks, we often forget about Banco Santander (LSE: BNC) (NYSE: SAN.US). But we really shouldn’t — they’re all pretty much international these days and it matters little whether a bank’s headquarters are in England, Spain, or wherever.

In fact, there are compelling reasons why Santander should be considered for your ISA — and don’t forget, from July this year we’ll be able to invest up to £15,000 in the tax-protected scheme.

What dividends!

For one thing, Santander pays one of the biggest dividends in the business — shareholders enjoyed a 9% yield in 2013, after a couple of 10% years, and there’s 8% currently forecast for 2014.

Now, there is a problem with that — over the past two years the dividend has not been covered by earnings per share, and City analysts aren’t expecting that to happen until 2015. So how has the bank been doing it?

Well, the majority of shareholders have been taking their dividends as scrip — they get new shares issued to the value of the payout, and Santander doesn’t have to find the actual cash. That does present another problem, that earnings per share (EPS) is continually being diluted by the rising number of shares in issue, and that puts downwards pressure on the share price.

Volatile price

But Santander shares have still been performing reasonably well in the recent short term — at 548p they’re up nearly 15% over the past 12 months, easily beating the FTSE 100. Over five- and ten-year periods, the price has suffered along with the whole of the sector, but those big dividends have provided compensation.

For an ISA investment, I reckon we should be looking at a horizon of 20 years or more, and we should reinvest any cash we get from dividends — and to that end, a company offering a scrip alternative to cash is a welcome bonus, as we don’t incur any reinvestment costs.

What’s it worth?

What might an investment in Santander today be worth in 20 years time?

Suppose we get no share price appreciation in that time, and instead the forecast dividend yield of 7.9% for 2015 continues for another 20 years — every £1,000 invested now in Santander would turn into £4,600!

Shares are cheap

Sure, the dividend yield may well fall, although it should be covered by 2105. But the shares are on a forward P/E of only 9 based on 2015 forecasts, and Santander is seeing its business picking up as the recovery strengthens — predictions suggest EPS rises of 26% and 17% for the next two years. Share price rises seem almost inevitable.

All in all, Santander looks like a pretty good long-term bet to me — and that’s the stuff of which top ISA investments are made.

Finally, our top experts at The Motley Fool have produced their Guide To Investing In Banks, so if you're thinking of putting some of your own money into Banco Santander or any of our other banks, it could be essential reading.

The report is free for a limited time, so click here to get your personal copy today.

Alan does not own any shares in Banco Santander.