Banco Santander, S.A. (ADR) (SAN), Banco Bilbao Vizcaya Argentaria SA (ADR) (BBVA): You Should Beware These High-Dividend Payers

Page 1 of 2

Some European banks have been great dividend payers in a zero interest rate world. At current market prices, Spanish banks such as Banco Santander, S.A. (ADR) (NYSE:SAN) and Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA), mostly known as BBVA, offer 8.5% and 4.6% cash dividend yields, respectively. But are those dividends sustainable? Let’s analyze each case separately and offer a viable solution.

Banco Santander, S.A. (ADR) (NYSE:SAN)

High-dividend champion

Banco Santander, S.A. (ADR) (NYSE:SAN)’s Chairman, Emilio Botin, has maintained a high dividend throughout the financial crisis, even when profits were falling fast. Last year, the bank kept up its tradition of paying its huge dividend, even though earnings per share plummeted due to high impairments related to Spain’s sluggish economy. The bank’s 2012 payout ratio was just above 235%. This year, if the dividend is kept, the payout ratio should fall to 142% as EPS grows by more than 89% year-over-year as Credit Suisse’s analysts expect. Nevertheless, I wouldn’t expect a payout ratio below 100% until 2016.

The market believes Banco Santander, S.A. (ADR) (NYSE:SAN) will cut its high dividend. According to analysts at Citigroup and Barclays, the Spanish bank should cut its dividend soon. A report from Barclays reads as follows: “We see significant risk to the Banco Santander, S.A. (ADR) (NYSE:SAN) dividend.” That said, Santander has repeatedly insisted that it would not change its long standing policy of maintaining its existing dividend.

Since Banco Santander, S.A. (ADR) (NYSE:SAN) pays the bulk of its dividends distributing new equity to shareholders, I think the dividend is sustainable unless earnings do not recover as expected. The main short-term risk to the bank’s dividend is to be found in regulation. The European Central Bank or the Bank of Spain might regulate dividend payments, making a dividend cut impossible to avoid.

A much more sustainable proposition

Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) offers a high, although sustainable, cash dividend yield. As a matter of fact, and despite some analysts expectations, I am confident of the sustainability of BBVA’s cash dividend if the bank would chose to keep such policy. The reason? Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA)’s 2012 payout ratio was just above 139%, and if earnings come up as expected (Credit Suisse’s analysts expect EPS to go up by 78% year-over-year), the ratio could fall down to 77.5% as soon as this year without touching the current cash disbursement.

Even when the expected payout ratio of Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) is much lower than Banco Santander, S.A. (ADR) (NYSE:SAN)’s, the management at the former bank is not as committed as Botin to its cash dividend policy. Besides, Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) is slightly more concentrated in Spain than Santander (Santander generates over 50% of attributable profits in Latin America and over 13% in the UK). As I explained in Santander’s case, the most relevant threat to Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA)’s current dividend can be found in regulation.

Page 1 of 2