Where Next for the Banco Santander, S.A. (ADR) (SAN) 10% Dividend?

Is Santander’s dividend safe?
Santander’s chairman, Emilio Botín, believes that 2012 will prove to be a “turning point,” after which earnings will begin to recover. It’s too early to say whether he is right, but Santander’s shares currently trade at about 510 pence, at which level they offer a 10% yield, based on the 0.60 euro per share payout the bank has maintained for the last three years.

Abnormally high dividend yields like this normally indicate an above-average level of risk, and Santander currently trades at a price to book ratio of just 0.75, suggesting that the financial markets believe there is still a lot of risk attached to the bank’s assets. The ultimate risk is that Spain will be forced out of the eurozone, but I think a more realistic risk is that the current situation — where Spain is in a deep recession — will continue for much longer than expected, depressing Santander’s earnings and increasing its bad debts still further.

If this happens, there is a real risk that Santander might be forced to cut its dividend at some point in the next two years, but it’s worth noting that even if the dividend halved, the shares would still offer a prospective yield of 5% — well above the FTSE 100 average of 3.3%. I think Santander’s shares are a fairly attractive purchase at present, but it would be rash to rely on the dividend remaining uncut.

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The article Where Next for the Banco Santander 10% Dividend? originally appeared on Fool.com and is written by Roland Head.

Roland does not own shares in any of the companies mentioned in this article.

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