Banco Santander (LSE: BNC) (NYSE: SAN.US) has trodden its own path during the financial crisis, taking huge losses in Europe while making big profits elsewhere — and maintaining its astonishing 9% dividend yield.
Santander shares have risen by 7% over the last six months, and I reckon there’s a lot to like about the eurozone’s largest bank.
1. Santander isn’t an investment bank
Santander’s business is built on traditional banking — loans and deposits — not high-risk investment activities. This focus on traditional banking makes the bank’s results relatively easy to understand.
The size and strength of Santander’s emerging market banking businesses have enabled it to make provisions totalling €65bn for bad debts over the last five years, while also increasing its core capital by €18bn, strengthening its Basel III core capital ratio to 10.9%.
2. Diverse profits
In 2013, 47% of Santander’s profits came from Latin America, 43% from Europe and 10% from the USA. The two biggest contributors were Brazil (23%) and the UK (17%).
Although the group could be heavily exposed to a downturn in Latin America, its diverse profits have enabled Santander to survive losses and setbacks that have left smaller banks in Spain and the UK scrambling for bailouts.
3. Income
Santander’s legendary 9% dividend yield generates mixed opinions. The majority of shareholders opt to receive the payout in share format, through a scrip dividend.
For UK shareholders, this has a number of advantages, the biggest of which is that Santander’s scrip dividend is not subject to Spain’s 21% withholding tax on overseas dividend payments.
A second advantage is that the scrip scheme has enabled Santander to maintain its €0.60 annual payout throughout the financial crisis. According to Santander, this approach has enabled it to provide a total shareholder return (share price performance plus dividend) of 43.5% since the beginning of 2008, compared to an average of 17.4% for European banks.
A strong buy?
I rate Santander as a buy, but it isn’t perfect. The bank’s 109% loan-to-deposit ratio needs to fall further, while its underperforming assets in the UK and need to start pulling their weight and generating more profit.
However, Santander’s mixture of emerging and developed market banking is a big attraction for me, and although its 2014 forecast P/E of 15.5 isn’t cheap, I think that it’s fair, especially when the firm’s 9% yield is taken into account.