When we’re looking at the banking sector, it’s easy to forget that the FTSE 100 is home to more than the usual British-based banks.
Take Banco Santander (LSE: BNC) (NYSE: SAN.US), for example — it’s share price has soared by 24% over the past 12 months to 592p, compared to a flat FTSE. Are the shares worth buying now? Here are three reasons why they just might be:
1. Falling dividend
Yes, in this case, a falling dividend is good news!
Banco Santander has been paying out absurdly high dividend yields that were nowhere near covered by earnings — 8.8% last year and 9.7% the year before. It could do that because most people took scrip, so the cash wasn’t actually needed. But that brings about constant dilution of earnings per share, so every new share you take now means less money coming your way for each of your existing shares.
Thankfully the Spanish giant is moving towards a more sustainable dividend model, and this year is forecast to yield only 7.4%, dropping to 6.6% in 2015. Even then, the payout will be barely covered, but the direction is the right one — I’d hope to see a sustainable 4.5% to 5% within a few years (at today’s share price).
2. Low valuation
Santander shares are on a forward P/E of 12, dropping as low as 10 based on 2015 predictions, even after the last year’s price rise. For a bank in good health, that looks too low to me. Not many analysts concur, admittedly, with a majority sitting on a Hold stance (and of the rest, the Sells outweigh the Buys). But I think a lot of that is due to the current dividend model making valuation hard to work out, and adding significant uncertainty to expectations.
But they are pretty firm on their predictions of at least 20% EPS growth for each of the next two years.
3. Euro crisis over
Banco Santander is the eurozone’s biggest bank by market cap, and the euro crisis was not good for it — to put it mildly.
But the blighted currency union has survived, and is recovering more strongly than many of us had feared. Spanish debt has moved on from its pariah status too, with lenders apparently trusting the Spanish government more and demanding considerably lower bond yields than during the crisis.
The whole eurozone economy is still struggling, but it really doesn’t look like it’s going to collapse now — and Santander should benefit from the recovery that is surely coming.