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Banco Santander SA Plans Huge Cash Call To Bolster Balance Sheet

It emerged today that Banco Santander (LSE: BNC) (NYSE: SAN.US) is planning to raise $9bn — €7.65bn — from a share sales in order to bolster is capital position and fund expansion plans. 

Additionally, Santander plans to use part of the cash to fund a cash dividend. The bank has traditionally paid the majority of its dividend as a script issue. (This is why Santander has managed to sustain its high dividend payout, which is currently equal to a historic yield of around 9%.) But now, Santander says it will divide the annual payment to shareholders into three cash dividends and one scrip dividend.

Unfortunately, a higher cash payout has forced Santander to cut its 2015 dividend payout by two thirds, to 20 cents per share, against 60 cents previously. For UK shareholders this implies that the bank’s dividend yield will fall to around 3%. 

Under pressure

Santander and its new executive chairman Ana Botín, has been under pressure to bolster the bank’s capital ratio for some time now. Indeed, City analysts believe that Santander has one of the weaker balance sheets among its European peers. Analysts believe that under Basel III rules, the bank’s fully loaded capital ratio is less than 9%, the lowest of European peers. 

Still, in last year’s European Central Bank stress tests, Santander fared better than many of its peers with its tier one capital ratio falling to only 8.9% after a simulated three-year period under stress. A ratio of 8.9% was far above the minimum requirement of 5.5%.

For long-term holders this announcement is good news. An additional $9bn will not only give Santander enough cash to strengthen its balance sheet but it will also give the bank plenty of financial fire power to expand. 

New chapter 

Today’s announcement also marks a new chapter for Santander. Indeed, the bank has been going through somewhat of a transformation over the past six months after Emilio Botín, who ran the bank for 28 years, died in September.

Emilio’s daughter, Ana Botín, took charge of the bank after his death and has started to shake things up. In November, Ana replaced CEO Javier Marin in November with finance boss Jose Antonio Alvarez who was seen as a rising star at the bank. And now the new management has decided to raise fresh capital, a move that’s long been considered the right course of action but is something the old management failed to act on. 

Not good news

However, for income investors, today’s news will come as a shock. Santander’s dividend yield used to be one of the best around but today’s cut means that the bank now offers a yield similar to that of its peers. Nevertheless, the additional capital and plans for growth should ensure that, over time, Santander’s payout steadily increases.

So, while today’s news is a shock, Santander is laying the foundations for long-term growth.  

On the other hand, if you've decided to turn your back on Santander following today's announcement, and you're now looking for other high-yield opportunities, I strongly recommend that you read our guide to high-yield investing.

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Rupert Hargreaves 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.