Santander Looks Poised For Further Gains

Aug.11.14 | About: Banco Santander (SAN)

Summary

Banco Santander sold off despite a solid earnings report.

Santander is showing impressive performance in its units around the world and the Spanish economy is recovering.

Santander is oversold and pays a nice dividend while you wait for the price to recover.

Why Santander is the Bank for You Now

Banco Santander, S.A. (NYSE:SAN) is a well-managed Spanish holding company, the largest bank by market value in the Eurozone, with diversified financial operations around the globe. It has had a difficult few years due to problems with the Spanish economy, but the bank is recovering along with Spain. Santander recently reported earnings that beat expectations and that suggest further growth lies ahead, but the stock inexplicably sold off. While waiting for the stock price to reflect the bank's improving prospects, it pays you a healthy dividend to wait.

I have been following SAN for years and have owned this stock since early 2013 in a retirement account. I reinvest the scrip dividends.

Why Santander?

Santander reported solid earnings on 31 July 2014. Its second-quarter profit rose 38% year-over-year and 12% versus the previous quarter, beating estimates. Net income climbed to 1.45 billion euros ($1.94 billion) at 0.12 per share. This exceeded last year's earnings for the same period by 30.15%. For the first six months of the year, profit was 22% higher than in 2013.

The earnings report was a lot better than just the headline numbers. During the earnings call on 31 July 2014, CEO Javier Marín Romano noted that "Grupo Santander is on the path to a recovery in profits and profitability that will continue in the coming years and spread to all units."

Specifically, the non-performing loan ratio, which has been the bank's Achilles Heel, dropped for the second consecutive quarter, to 5.45%. The loan-to-deposit ratio is high, 114%, but dropping, and the liquidity coverage ratio "is above 100% in all geographies." That non-performing loan ratio number is better than the Spanish average of 7.59% and comparable to 5.0% at Lloyd's Banking Group. Furthermore, "Our expectation is to continue to see the nonperforming loan ratio trending down and the cost of credit trending down."

The bank isn't worried about upcoming stress tests, with the CEO pointedly noting, "And specifically through a stress test, we believe that we will go through very nicely."

Santander is a global bank, so it isn't just about Spain, which represents only 13% of bank profits. The United Kingdom contributes 20% of profits, so in terms of income, Santander is more a British bank than a Spanish one. Brazil represents 19% of profits, and the United States chips in 9% of profits. Lesser amounts are contributed by Mexico, Chile, Poland and Germany.

In terms of individual countries, the bank said that:

  • Spain - lending rose 2% in the quarter, while exposure to bad loans dropped by 8.9%;
  • Portugal - the bank is gaining market share organically and is the most capitalized bank in the country;
  • Poland - "generally speaking, the unit is generating recurring profits in the region of 20%";
  • U.S. - "Solid results in the quarter, EUR 270 million plus 25% quarter-on-quarter attributable profit growth in the 3 units, Santander Bank, Puerto Rico, and SCUSA";
  • Brazil - "The profit was 2.6% higher than in the first quarter" despite the country's current economic weakness;
  • Mexico - "We open[ed] more than 100 branches in the last 18 month, and this is reflected in our market shares";
  • Chile - "We're gaining market share in lending";
  • Argentina - "the first half profit, EUR 135 million, 30% higher year-on-year." and "the bankruptcy of the country would not affect us at all";
  • "Uruguay, profit increased 9%; and in Peru, 27% higher.";
  • Colombia - a new subsidiary is just opening for business;
  • U.K. - "Profit was up 5%, in the quarter, and 54% compared with the previous year."

Santander thus is prospering in all of its markets, and the worst of the economic problems that caused it problems the last few years appears to be behind it. It also is making inroads to China.

Dividend

Santander has paid a dividend for the past 26 years. Since 2011, it has paid a $0.82 dividend that currently yields 8.67%. This is incorrectly reported on many sites which do not adjust for the fact that the bank posts its dividend as 0.60€, not $0.60. Given exchange rates, that means the true dividend is understated in sites that use mechanical formulas. The next dividend ex-date should be on or around 10 October 2014.

The dividend for the rest of the year is set; as stated on the conference call, "the policy for 2014 has been already approved, $0.60 in foreign scrips, and the policy for 2015 will be approved in the general shareholders' meeting" held next year.

The dividend is paid in scrip shares unless you opt to take it in cash. If you opt for a cash dividend, a 21% Spanish withholding tax is subtracted. Over 80% of investors typically take the reinvested dividend in scrip shares. The Santander website explains the dividend scheme in great detail. Brokers generally like it if you call them to confirm how you wish to receive the dividend though technically you don't have to. I generally call to make sure it is done right.

While some in the past haven't thought the dividend sustainable, Santander has maintained with an iron fist the 0.60€ dividend for the past several years despite all of the European financial problems and the Spanish real estate crash. The fact that the overwhelming majority of shareholders choose the scrip dividend does create some dilution, but the rising share price has handled that nicely.

The dividend yield has dropped from well above 11% when the stock was hitting its lows to the current levels as investor confidence in the stock has improved, and likely will drop further as the share price continues its upward trend. However, a dividend over 8% in a stock that has been performing well is always nice to have. Since the bank didn't cut the dividend during the bad times, it would seem odd if it did so now that its finances are improving.

Why Santander Now?

Aside from the sparkling improvements in earnings, Santander is poised to benefit from the improving Spanish economy. It appears that Spain finally has turned the corner, though word hasn't gotten out to a lot of investors yet.

The International Monetary Fund has upgraded its outlook for Spain significantly over just the past six months, doubling projected 2014 growth from 0.6% to 1.2%.

The improvement in the Spanish economy has caught just about everybody by surprise. The IMF just raised its growth forecast by 0.3% due to 30 July 2014 preliminary figures from the National Statistics Institute of 0.6 percent growth, the strongest Spanish quarterly growth since 2007. The Spanish economy is accelerating, with growth in the previous four months only hitting 0.4%. The Spanish government is planning to raise its 2014 and 2015 economic projections in September due to the numbers. Compare this to France and Germany, which are struggling along with little or no growth.

There are multiple signs that the economic prospects in Spain are brightening. The recent purchase by Spain's second biggest bank, Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA), of the remains of Catalunya Banc SA for 1.19 billion euros ($1.6 billion) was a big sign of confidence in the Spanish economy. Catalunya had to be nationalized in 2011 due to the real estate crash, and its portfolio still is loaded with problem properties. Buying all the troubled properties held by Catalunya - and aggressively outbidding others, including Santander - shows that BBVA thinks the values of those properties is headed in the right direction. They know the Spanish real estate market a lot better than we ever will.

There is still a lot of work left to do in Spain. But the country once again could be on the verge of being one of the brightest economic spots in Europe. Spain is just one piece of the SAN puzzle, albeit an important one.

Chart

Another reason to look at Santander is because it is on sale. Santander sold off on the earnings report despite beating estimates, but it appears to have stabilized, at least for now. The overall market has been weak since then and that may have had something to do with it. The RSI and MACD both suggest an oversold condition, and the 200-day moving average should provide support if it gets down there. The sell-off was on volume that was high but was not overly impressive. That suggests on a technical basis that selling conviction was not particularly strong, perhaps more of a sell-the-news or profit-taking phenomenon. After all, the stock did have an epic run higher.

Click to enlarge

Source: Stockcharts.com

SAN has been in a long-term uptrend since bottoming at 4.88 in mid-2012. Since its intraday low of 6.30 on 24 June 2013, it has risen 53.8%. For those looking for older data, it used to trade under symbol STD.

At a 17 price-earnings ratio, Santander is not overpriced relative to the overall market.

Conclusion

Santander is a solid choice for dividend reinvestment and those looking for improving prospects over time. It is especially attractive in a tax-advantaged account where you take the scrip dividend.

Disclosure: The author is long SAN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.