We’re all aware only too painfully of how tough a time our better-known high-street banks have had in recent years, but what about Banco Santander (LSE: BNC) (NYSE:SAN.US)?
Well, the Spanish-headquartered banking group (which, incidentally, is the biggest in Europe in terms of market capitalization) had a tough time, too, and saw earnings per share (EPS) plummet.
Just take a look at this:
| Dec | EPS | Change | P/E | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2009 | 105¢ | -14% | 11.9 | 48.0¢ | — | 3.9% | 2.2x |
| 2010 | 94¢ | -10% | 8.8 | 60.0¢ | +25% | 7.3% | 1.6x |
| 2011 | 60¢ | -36% | 9.9 | 60.0¢ | 0% | 10.1% | 1.0x |
| 2012 | 23¢ | -62% | 25.7 | 59.6¢ | -0.7% | 10.1% | 0.4x |
| 2013 | 40¢ | +74% | 16.3 | 60.0¢ | +0.7% | 9.2% | 0.7x |
| 2014* | 51¢ | +26% | 10.9 | 53.1¢ | -12% | 8.1% | 0.9x |
| 2015* | 59¢ | +17% | 9.3 | 50.2¢ | -5.5% | 7.6% | 1.2x |
* forecast
That’s a pretty nasty collapse in earnings, but the other thing of note there is that dividend — how can a company keep up such a high yield that isn’t even covered by earnings some years?
It’s in the scrip
The reason is largely because the bulk of Santander shareholders take their dividends in the form of scrip, and that means Santander doesn’t actually have to shell out cash to cover them. Of course, you don’t get anything for nothing, and issuing new shares for scrip dividends will dilute the share base.
But the price has still held up reasonably well and, at 553p, it’s about flat over 2 years.
The current EPS growth forecast of 26% for this year still won’t be enough to cover earnings, even after that 74% rise in 2013, and by 2015 we should still see it only just covered. But how realistic are those prospects?
Profits bouncing back
Well, those 2013 results brought with them an 80% rise in net profits, from £2bn to £3.6bn, with fourth-quarter profits more than doubling. The bank’s previous high rates of bad debt provisions, which were unsurprising during the Spanish economic catastrophe, also improved with a fall to £1.4bn.
Approximately 47% of the bank’s profits for the year came from the emerging markets of South America — which brings some risk, but with it should come significantly greater growth potential. And it might surprise some to learn that the UK is one of the biggest contributors to the group, accounting for 17% of the year’s total.
Chairman Emilio BotÃn seems to think Santander is back on the growth path too, saying
“After several years of strengthening the balance sheet with capital, Banco Santander is embarking on a period of strong profit growth in the coming years“.
Worth a growth punt?
That price to earnings (P/E) valuation of more than 16 perhaps looks a little high at the moment, but Banco Santander does look to have a pretty reasonable chance of strong growth over the coming five years and more, thanks to the combination of strengthening capital ratios, falling bad debts, signs of recovery in its home market, and its exposure to up-coming markets.