Banco Santander: A Safe 12% Yield From Europe

| About: Banco Santander (SAN)

The share price of Spanish banking giant Santander S.A. (STD) has declined somewhat dramatically in recent days and the resulting low share price has pushed the dividend yield on the NYSE traded ADR shares up to about 12%, before tax withholding. At that yield and the related share price, Santander provides an interesting play on some sort of financial stability in Spain and Europe. As a bonus, the company has a large Latin America banking presence, providing profits out of those robust economies.

First, a note about the company's dividend payments. Santander pays distributions four times a year of varying amounts. However, digging through the company's financials reveals the total dividends for each of the last four years equaled about euro 60 cents. The first two declared dividends for 2012 are on pace to also hit the euro 60 cents rate over the course of the year. Spanish withholding taxes on dividends are at a 21% rate, so U.S. investors receive about a net 60 cents per year, or a 9.3% after tax yield. If the shares are held in a taxable account, the taxes withheld can be deducted. Santander also offers ADR holders an option to take dividends in the form of additional ADR shares. No withholding tax, but only whole shares are distributed.

For 2011, the Santander's pre-provision profits - net operating - increased by €500 million to €24.4 billion. Recurring profits for the year declined to €7.0 billion from €8.2 billion. Capital gains of €1.5 billion goes on top of recurring profits for 2011 and loss provisions of €3.2 billion are subtracted, leaving a net profit of $5.35 billion in a tough 2011.

Several items about Santander make the stock an interesting investment prospect:

  • With the large amount of loss provisions, the company has now set aside reserves equal to 50% of foreclosed Spanish real estate loans. This is up from 10% coverage in 2008 and 31% in 2010.
  • Core capital under Basel II rules is 10.2%, up from 6.25% in December 2007 and 8.8% in December 2010.
  • The company generates over 50% of attributable profits from the Latin America banks including 28% from Brazil and 10% from Mexico. These profits are not affected by European political and financial problems. Interesting note: Banco Santander Brazil (NYSE:BSBR) has a current yield of 6%.
  • It appears the company has little or no exposure to sovereign debt from the problematic European countries.

At this point Banco Santander looks like a buy-and-wait investment. While waiting, investors collect a double-digit yield and underlying results are held up by strong non-European subsidiaries. When The European financial system does stabilize, the company and share price should increase substantially. This was a $17 stock at the end of 2009 and could reach that number again in a few years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.