Is Banco Santander SA Really In Good Shape To Yield 6.9% In 2015?

News of a potential dividend cut is, of course, never greeted with unbridled enthusiasm by potential investors. But in the case of banking goliath Banco Santander (LSE: BNC) (NYSE: SAN.US) the likely creation of a more sustainable payout policy under new chairperson Ana Botín should stand the firm in good stead to keep churning out market-smashing yields.

City analysts expect the business to cut last year’s 60 euro cent per share payment to 58.1 cents in 2014. And a further meaty reduction, to 50.7 cents, is currently chalked in for 2015. As a result Santander’s terrific yield drops from 7.9% for 2014 to a still-respectable 6.9% for 2015.

Meagre earnings cover expected to reign

At face value, however, it could be argued that dividend cuts this year and next could actually clock in much worse than current forecasts suggest and put these heady yields under pressure.

Firstly, earnings are still expected to bear an unhealthy correlation with dividends through to the end of next year. Indeed, earnings of 49.5 cents per share for 2014 continue be outstripped by the anticipated payout.

And although a figure of 59.2 cents finally tips the pendulum back in the right direction, dividend coverage of just 1.2 times stands some way below the safety threshold of 2 times or above. So prolonged cyclical weakness in developing regions and/or the eurozone could put prospective dividends under the microscope.

… but bulky balance sheet should dispel payout fears

Still, I believe that the strength of Santander’s balance sheet should assuage any fears that payments could disappoint. Last month’s CET1 stress tests by the European Banking Authority saw the Spanish bank emerge as the UK’s best capitalised bank, with a reading of 9% under “adverse” conditions sailing ahead of the 5.5% target.

And following extensive restructuring following the 2008/2009 financial crisis, I believe that Santander’s bubbly earnings projections should underpin confidence in the level of medium-term payouts. Indeed, projected growth of 24% and 20% in 2014 and 2015 respectively indicates the excellent progress the bank has made in streamlining and de-risking the company.

On top of this, I am convinced that Santander’s rising exposure to the lucrative emerging markets of Latin America — the company already sources around 40% of profits from the region — not to mention tremendous financial firepower and subsequent ability to dig out more acquisitions in red-hot growth sectors, should make the bank a terrific dividend selection 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.