Banco Santander - Growth In Disguise

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Rubicon Associates

Banco Santander (STD) continues to make headlines as its stock has fallen 26% since mid-March.

Source: Bloomberg

The case for the bank (and the European banking sector) has been hotly debated in recent months given the renewed focus on Europe and Spain in particular.

Santander, on the surface, looks extremely compelling as it trades at approximately 60% of book value, has a dividend yield of 13%, a P/E of 7.7x, a PEG ratio of 0.51 and strong core capital ratios.

About that dividend:

Recall that during the Q4 earnings call, the CEO made the following statement regarding dividends:

Right, our payout or shareholder return policy is already set, and I will confirm that there will be no changes. We will continue with the same percentage of scrip dividend we've had until now. If change were to be proposed, it would have to be approved by the AGM. But for now, this will continue to be our payout policy. As the Chairman also reported during our Investor Day, it will continue to be EUR0.60 per share and there's not really very much else I can add to that.

Now, many will say "the best laid plans of mice and men", and they might be right. If Banco Santander increases scrip dividend, it dilutes shares, if it cuts the dividend, the yield will fall. If the dividend yield was cut in half, it would still be above the large US based banks and if they dilute the shares with scrip, it will not be significant enough to constrain future growth.

And the capital:

Source: Banco Santander

As the chart above shows, the bank has raised core capital ratios 141bps since December 2009 and 244bps since 2008. The operating ratios from the bank's 2011 annual report are:

As the above table shows, ROE, ROA, ROTE (return on

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Rubicon Associates profile picture
Rubicon Associates is headed by a Chartered Financial Analyst charter holder with over 20 years of experience in the investment management industry focused on the analysis, investment and management of fixed income and preferred stock portfolios. Over the years, he has analyzed and invested in both public and private companies around the world as well as advised institutional clients on fixed income strategies and manager selection. The principal has been responsible for managing nearly seven billion dollars in credit investments across the capital structure and overseeing the research and trading of credit market activities. Rubicon Associates has written for Seeking Alpha, Learn Bonds, a newsletter and in addition to advising institutional and private investors.

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