In my tour around some of our top FTSE 100 companies with a view to their prospects for 2014, I’ve been looking at a few of the banks of late. Today it’s time to turn to Banco Santander (LSE: BNC) (NYSE: SAN.US), and we’re definitely looking at a game of two halves here, with a woeful few years during the recession but a pretty strong outlook being presented by analysts now that economies seem to be on the mend.
To understand what I mean, let’s take a look at the bank’s last five years of headlines along with the analysts’ consensus for another three years:
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| Dec | EPS | Change | P/E | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2008 | 122c | -21% | 6.2 | 65.1c | — | 8.6% | 1.9x |
| 2009 | 105c | -14% | 11.9 | 48.0c | -26% | 3.8% | 2.2x |
| 2010 | 94c | -10% | 8.8 | 60.0c | -20% | 7.2% | 1.6x |
| 2011 | 60c | -36% | 10.0 | 60.0c | 0% | 10% | 1.0x |
| 2012 | 23c | -62% | 25.9 | 59.6c | -0.7% | 10% | 0.4x |
| 2013* | 42c | +82% | 12.4 | 59.8c | +0.3% | 9.4% | 0.7x |
| 2014* | 52c | +24% | 10.1 | 48.4c | -19% | 7.6% | 1.1x |
| 2015* | 62c | +20% | 8.4 | 47.6c | -1.7% | 7.5% | 1.3x |
* forecast
That’s a pretty nasty five-year record of falling earnings. And though dividends were cut too, they declined nowhere near as fast and cover slumped — in 2012, earnings weren’t even enough to cover half of the dividends paid out.
The yield has remained strong each year, but it’s got to be unsustainable at current rates unless those profits improve. And the yield has to be seen in the context of a share price slump. This is what Santander’s five-year chart looks like:
Bouncing back
But what a turnaround too!
Analysts are forecasting a substantial 82% growth in earnings per share (EPS) in 2013, which should lead to EPS recovering to more than 2.5 times its 2012 low by 2015. And with restraint on the dividend front, we should see dividend cover getting back too — 1.3 times by 2015 is not enough, but it’s headed in the right direction.
If you bought now, those predicted yields would look very tasty with the prospect of a share-price recovery as a nice sweetener. But how realistic are they?
Whence the recovery?
In its past few updates, Santander hasn’t said a great deal about its dividend policy, but it has pointed to the ending of recession in Europe. And that’s really been the underlying problem behind those five years of weak results. About a quarter of Santander’s profits in the nine months to September 2013 came from mainland Europe, with the UK and USA making up another quarter, and all have had a torrid time — the remaining half of the bank’s profits came from Latin America.
The UK seems to be leading the rest of Europe out of recession, and in the nine months to September 2013 Santander saw a profit rise of 7% here. And the bank has bolstered its liquidity along with the rest of the sector, with its loan-to-deposit ratio dropping from 117% to 108% over the course of 12 months.
In addition to a recovering Europe helping Santander back to rising earnings, there’s also a significant emerging markets play here — of the half of Santander’s profits from Latin America, around half of that is from Brazil.
The risks
It’s true that we have more analysts tipping Santander as a Sell than a Buy right now, but I think that’s short-sighted.
The biggest risk in my mind is that those high dividend yields could prove unsustainable over more than the very short term. But rather than a crunch rebasing, I think a holding at current absolute levels or a small reduction while earnings rise should be enough to get that cover up to sufficient levels.
Verdict: Strength from diversification in 2014!
