We’re used to seeing dividends boosted when earnings are growing, and the annual payout under threat when earnings fall. But if you want to see a pretty weird alternative, look no further than Banco Santander (LSE: BNC) (NYSE: SAN.US).
Earnings slump
Santander’s earnings per share (EPS) figure has been on a steady slide, from 104.5c back in 2009 all the way down to just 23c by December 2012 — that’s a fall of a whopping 78%! We did see the start of a recovery in 2013, to 40c per share, but that’s still way down.
The share price took a long slide from 2010 to mid-2012, though since then it’s perked up a little to 590p for an overall loss of a couple of percent over five years — the FTSE 100 is up nearly 60% in the same time.
Soaring dividends
Would you expect the annual dividend to have been pared over the lean years? If you assumed so, you’d be wrong — you see, from 48c per share in 2009, it’s been hiked all the way to 59.6c in 2012 and then to 60c in 2013. The 2012 payout represented a massive yield of 10%, falling only slightly to 9.1% for 2013 as the share price recovered a little.
Those who like to see their dividends well covered might be shocked to learn that less than 40% of 2012’s payout could come from earnings, and 2013 earnings had recovered to only two-third’s of that year’s cash handout. So how was that managed?
Well, Santander is in the unusual position of having most of its shareholders taking their dividends in the form of scrip, so the company hasn’t actually had to pay out much cash — it’s just issued a shed load of new shares each year and handed those out instead.
That, of course, has compounded the fall in earnings per share, with profits being spread over a larger number of shares each year — and it’s contributed to the share price slump.
Back to rationality
Now the signs are that Santander is moving towards a more conventional relationship between earnings and dividends — while EPS is forecast to rise by 22% in 2014 and a further 19% in 2015, the dividend is expected to be slimmed down each year and reach barely more than half 2013’s payout by 2017.
On today’s share price, the predicted cash of 56c per share for December 2014 would still provide a yield of 8%, but that looks set to fall to 7.1% next year and down to a more sustainable 4.6% by 2017 — at which point the dividend should be comfortably covered by earnings.
But should we buy?
What do the pundits think we should do with Santander shares? Well, in this unusual situation it’s a hard company to value, and it’s no surprise to me that the majority are sitting on a Hold rating. Of those suggesting action, the Sells outnumber the Buys by eleven to four.