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The Best Reason To Buy Banco Santander SA

SantanderBanco Santander (LSE: BNC) (NYSE: SAN.US) suffered along with the rest of the banking sector, but its shares are actually up over 10 years, by 25% to 599p — and that’s more than can be said for some.

And business looks to be going nicely. At the first-half stage this year, Santander reported a 22% rise in attributable profit over the same period a year previously, to €2.76bn. Loans were up 3% since December, with deposits and mutual funds up 4% and current accounts up 6%.

Liquidity was looking strong, too. The bank reported a loan-to-deposit ratio of 87% in Spain, where deposits exceeded loans, and a modest 114% overall for the group. Core capital ratio was up to 10.9%.

Chairman, Emilio Botín was understandably enthusiastic, saying: “Performance in the first half of 2014 proves that Santander is on track to return to pre-crisis profit levels. The Group’s geographic diversification has played a key role“. Sadly Mr Botín has since died at the age of 79, but shareholders should be pleased with his legacy of having transformed a small Spanish bank into the eurozone’s largest.

Unconventional

There is one pretty weird thing about Santander — its dividends.

While earnings per share were crumbling during the crisis — they crashed by 78% over three years — the dividend was held at very high levels. In 2011, it reached a yield of 9.6% and equated to all of that year’s earnings — and a year later it remained at the same level, and was less than 40% covered.

The yield in 2013 dropped to 8.7%, but only because the share price had risen, and the cash was only two thirds covered by earnings.

That was only possible because a large proportion of Santander’s Spanish shareholders have traditionally taken their dividends as scrip, and instead of actually handing over the cash the bank only had to issue new shares. Of course, you don’t get that for nothing, and the result is that future profits are spread more thinly over more and more shares.

But Santander’s approach to dividends is changing, and we have cuts in annual payouts forecast for the next two years — on today’s share price, analysts are predicting yields of 7.4% this year and 6.5% next. And on that basis, Santander’s forward P/E values of 12.4 and 10.2 look attractive.

Looking better

So why might you want to consider buying Santander shares?

Well, the bank’s profits are growing, lending is picking up slowly, and its capital position is healthy and strengthening. And the economic environment of its markets is steadily improving too. The UK is forecast to grow by around 3%, and though the eurozone is still some what behind, things are looking a lot better than just a couple of years ago — even the wide spread of bond rates across the region has narrowed considerably.

And that brings me to what I see as the key factor — this should all allow Santander to settle on a strong and sustainable dividend policy.

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Alan Oscroft 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.