Banco Santander (LSE: BNC) (NYSE: SAN.US) suffered during the crunch along with the rest of the European banks, but it’s well back on the path to earnings growth.
Falls in earnings per share (EPS) got steadily worse until things reached a bottom in 2012 with a 62% fall to just 23 eurocents. The dividend remained high, having peaked that year with a yield of 9.7%, but Santander’s dividend policy has been unconventional to say the least — more of that shortly.
The turnaround came in 2013, and for the year ended December that year we saw a 74% rise in EPS to 40 eurocents, and forecasts for the next two years continue the trend.
Back to earnings growth
For this December we have a 25% EPS rise on the cards, followed by a further 20% for 2015, taking Santander shares to a P/E of 10.7 this year and falling to 8.9 next year. That gives us PEG (P/E to earnings growth) ratios of only 0.4 for each of the two years — growth investors typically look for 0.7 or less.
That’s a modest valuation by traditional standards, but why? And will Santander live up to expectations?
At Q3 time things were looking good, with new chairman Ana BotÃn telling us that “Profit growth in 2014 helped consolidate the earnings recovery, thanks to improving revenues, falling costs and less need for write-downs“.
All in all, progress looks set to satisfy this year’s forecasts with no real problems.
Dividend
But what about that very high dividend yield?
Traditionally, Santander shareholders have taken their dividends as scrip, so new shares are issued with no need to hand over the actual cash. But that dilutes future earnings over more and more shares, and that’s really not a sustainable strategy in the long run.
But Santander is recognizing that and is reducing its dividend. There’s a modest 3.2% cut forecast this year, followed by a further 13% shave next year to 50 eurocents per share which would provide a yield of 7.6% on today’s share price of 535p.
That will leave dividends covered by earnings for the first time since 2011 (and then barely), and will represent a move towards a more conventional dividend policy — ideally a company’s dividends should be geared towards a balance of scrip and cash, so the two groups of shareholders are able to take what they want without any excessive balancing being needed.
Growth worth buying?
On the whole, I like the look of Santander these days, providing we see further cuts to its dividend in the coming years.