The Risks Of Investing In Banco Santander SA

Today I am highlighting what you need to know before investing in Banco Santander (LSE: BNC) (NYSE: SAN.US).

Europe on the slide

Latest growth figures from Spain gave analysts a welcome surprise this week. This data showed GDP rise 0.6% during April-June from the following three-month period, the quickest rate of growth since the 2008/2009 banking crisis smashed the Iberian state. And on an annual basis expansion during the second quarter rung in at 1.2%.

Santander generates 13% of total attributable profit from its home market, so news of recovering conditions here should in theory be greeted Santanderwith much fanfare. However, signs of intensifying weakness elsewhere in Europe should put the dampeners on any exuberant celebrations.

Indeed, in the continental powerhouse of Germany GDP actually slipped 0.2% during the past quarter, numbers this month showed, while in France growth flatlined in April-June for the second successive quarter. And Italy tumbled back in recession after a 0.2% drop followed the 0.1% fall recorded in January-March.

We have seen the catastrophic effect of financial contagion in the eurozone in previous years, so signs of renewed weakness in the financial engine rooms of the North — Germany and France account for two-thirds of the currency bloc’s GDP alone — bode ill for Santander, which generates more than a quarter of all profits from the region.

And with mainland Europe locked in a deflationary spiral, the effect of military action in Ukraine appearing set to intensify, and fresh political turmoil enveloping France, conditions could be set to worsen further in the coming months and years.

Payout projections in jeopardy?

So with Europe seemingly on the brink of fresh economic travails, and economic growth stalling in its critical Latin American markets — more than 40% of profits are currently generated from this region — forecasts of huge dividend payments this year and beyond could come increasingly under the cosh.

City brokers expect Santander to shell out dividends of 57 euro cents per share in 2014 and 51.4 cents in 2015, figures which generate monster yields of 7.7% and 6.9% correspondingly.

But to my mind, investors should be concerned by the lack of healthy dividend cover during this period. Indeed, the payout this year is predicted to outstrip earnings of 49.2 cents, while earnings of 59.8 cents in 2015 creates coverage of just 1.2 times, well below the security benchmark of 2 times.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.