Banco Santander, S.A. (NYSE:SAN)’s Dividend Is Sustainable

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.

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

Naturally, SAN’s 2012 numbers were not great. Results were depressed by a €6 billion provision for real estate losses in Spain. That is unlikely to be repeated, so I would expect earnings in 2013 to improve from 2012’s €2.6 billion by over 120%. That should take 2012’s 25x P/E to 12x in 2013 and to below the 10x mark by the end of 2014. Even if the bank looks expensive when trading at 1.3x tangible book value, I believe that there is upside ahead. Even if Spain continues to underperform the world economy, as it is expected for 2013; I expect the financial normalization that started in mid 2012 to continue this year. Its clear to me that we will not see a Euro breakup any time soon. European political leaders made it clear that the Euro is here to stay and Spanish bond yields already reflect such developments (ten year yields came down from over 7% to 5%). As  stated in a previous post, for the first time in a long time I am buying individual stocks. I already made two Spanish related bets SAN now and Telefonica that is expect to reinstate its dividend by early next year,  last week. Time will tell. At least I put my money where my mouth is.

The article Santander’s Dividend Is Sustainable originally appeared on and is written by Federico Zaldua.

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