2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8% this year, and is 52% higher than it was five years ago.
As Christmas approaches, I’ve been asking whether popular stocks like Banco Santander SA (LSE: BNC) (NYSE: SAN.US) still offer good value, after five years of market gains.
Back to basics
Santander’s share price has gained just 2.2% this year, and it’s down by 15% on five years ago, thanks to its exposure to the eurozone economy.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
Santander’s stubbornly high yield and stagnant share price could be an excellent value opportunity, so what do its numbers tell us?
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 17.4 |
| Trailing dividend yield | 9.9% |
| Cost to income ratio | 49% |
| Return on equity | 5.5% |
| Price to tangible book ratio | 1.7 |
As it turns out, Santander’s only obvious value attribute is its stonking 9.9% dividend yield, although its cost to income ratio is worth highlighting — 49% is very impressive.
Offsetting this somewhat is Santander’s 5.4% non-performing loan rate, which is uncomfortably high. But for many investors, this is a risk worth taking to get access to Santander’s €0.60 annual dividend, which has been unchanged since 2009.
2014: Recovery in sight?
Santander is Spain’s largest bank, but its businesses in Brazil, Mexico, Poland, the UK and the USA, mean that Spain only accounted for 7% of its profits last year.
This diversity has probably been Santander’s saving grace during the financial crisis, and has enabled it to report annual profits every year since 2008, despite multi-billion euro write-offs each year (last year, Santander took an €18.8bn charge against bad property loans).
Here’s how analysts are expecting things to shape up in 2014:
| 2014 Forecasts | Value |
|---|---|
| Price to earnings (P/E) | 11.7 |
| Dividend yield | 9.9% |
| Earnings per share growth | 23% |
| P/EÂ to earnings growth (PEG) | 0.6 |
These figures, which are based on current consensus forecasts, present a very bullish picture for 2014. An expected 23% increase in earnings per share will, if it happens, drag Santander’s P/E down to an affordable 11.7, while its dividend is expected to remain unchanged.
Will it happen in 2014? Santander’s chairman, Emilio BotÃn, said recently that “after several years of high levels of write-offs and reinforcement of capital, Banco Santander is preparing for a new period of increased profitability.”