Why Banco Santander SA Remains A Dividend Star Despite Expected Cut

Today I am explaining why Banco Santander (LSE: BNC) (NYSE: SAN.US) should remain a popular pick for income chasers.Santander

Yields still smash the opposition

Despite a backdrop of consistent earnings pressure, Santander has managed to keep rolling out market-busting dividend expansion. But in a bid to bolster its capital strength the bank is planning to scale back payouts in line with earnings from this year onwards.

In light of this strategy City analysts expect the bank to slash the payment not just this year but also in 2015. If realised, a projected 2014 dividend of 57.3 euro cents per share would represent a 4.5% decline from last year’s levels, while an expected dip to 51.3 cents in 2015 would mean an even larger decline, this time by 11.5%.

Despite these predicted declines, however, Santander is still a tremendous pick for those seeking mammoth dividend yields. Indeed, 2014’s estimated payment produces a gigantic 8.1%, destroying a forward average of 3.4% for the complete banking sector as well as the FTSE 100. And this remains high at 7.3% next year.

While balance sheet strength underpins pretty projections

Santander’s move to produce a more sustainable relationship between the bottom line and shareholder rewards is, of course, a step in the right direction. But not all is rosy in the garden, however, and the projected payout for this year still outpaces earnings of 49.6 cents per share.

For next year earnings are estimated improve to 60.2 cents per share, however, covering the dividend by 1.2 times. But this could still be considered scant cover considering the safety benchmark stands closer to 2 times prospective earnings.

Still, I believe that the stratospheric earnings expansion forecasted for this year and next — broker consensus suggests improvements to the tune of 24% and 21% in 2014 and 2015 correspondingly — underlines the tremendous growth, and consequently dividend, prospects at the firm.

The bank of course is a terrific bet on emerging markets, particularly those of Latin America where rising population levels and personal affluence levels should underpin exploding demand for financial products. Santander currently sources almost four-tenths of total profit from the region, and 19% from the continental powerhouse of Brazil alone.

A backcloth of worsening economic conditions in the eurozone remains problematic, of course, even though the firm carries a much lower risk profile than before the 2008/2009 banking crisis.

And investors should take heart from the European Central Bank’s rigorous stress testing over the weekend, which put Santander’s common equity tier 1 (CET1) capital ratio at a more-than healthy 12% under the baseline scenario. Any reading above 8% was considered a ‘pass’.

Given the bank’s solid balance sheet and excellent long-term growth potential, I believe that Santander should remain a stellar stock selection for those seeking bumper dividend potential for some time to come.

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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.