I highly recommend the article on Emilio Botin, the Chairman of Banco Santander, S.A. (NYSE:SAN), published by the Financial Times last weekend. The article told the story of how Botin made himself into one of the most powerful individuals in Spain and one of Europe’s most influential bankers. The article states that the bank is sustaining its huge +9.5% cash dividend (although that represents an expected 2013 116% payout ratio) because Botin’s family and their friends finance their lifestyle though SAN’s dividend. My theory is quite different from FT’s. I think Botin and the rest of the Board are clearly trying to give stability to SAN’s payout policy because they understand that the bank should be an income machine for its owners. Botin believes the bank can go through Europe’s recession without having to lower its dividend in a significant way and he is going to make every effort to sustain what he thinks should be the bank’s final end. I couldn’t agree more. Not many banks are run for their shareholders. SAN is a healthy example and I believe Botin when he says that the bank is over the worst.
I just bought 500 shares of SAN at $8.22 because I think there is considerable upside potential in the mid-term even if some problems lie ahead. Of course, there is some cause for concern, such as the non-performing loans in Spain that continue to creep up – from 4.2 per cent of the book two years ago to 6.7 per cent right now – or Brazil’s earnings that fell by a tenth. That said, SAN’s income diversification (Latin America generates 50% of attributable profits) and its 10.3% core capital ratio give me some tranquility. I rather have SAN to its main Spanish competitor, Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA), since BBVA is more concentrated in the Spanish market. It’s true that BBVA trades at a 15% discount to tangible book compared to SAN and it has a similar core capital ratio (10.7%), but pays a lower dividend and is less strong in Latin America and the UK (where SAN generates over 13% of its profits).