What Should Banco Santander SA Shareholders Do Now?

Should Banco Santander SA (LON:BNC) shareholders look elsewhere to replace their lost dividend income?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in Banco Santander SA (LSE: BNC) (NYSE: SAN.US) fell by 8% when markets opened this morning, as investors reacted to yesterday’s news that Spain’s largest bank is to raise €7.5bn in new capital to strengthen its balance sheet, and will slash its dividend by 66%.

If you’re a private investor who has grown used to receiving the firm’s generous €0.60 scrip dividend each year, then yesterday’s news may have been a big shock: your shares may now be showing a loss, and your dividend income has been cut by two thirds.

Overall, it seems like a good time for investors to reassess their commitment to Santander — should you stay put, or are there better choices elsewhere in the banking sector?

What’s the outlook?

Santander said yesterday that it expects to report a net profit of €5.8bn this year, 30% more than last year.

After allowing for the new shares which will be created as a result of the bank’s cash call, this equates to earnings per share of around €0.42, which is slightly below consensus estimates, and places the shares on a P/E of around 14.6.

This seems pricey compared to most UK banks:

Bank

2014 forecast P/E

Lloyds

9.4

RBS

10.0

HSBC

10.1

Barclays

11.0

Banco Santander

14.6

It’s a similar story in the dividend department. Santander has come under pressure from Spanish regulators to pay a dividend that is covered by earnings.

The bank’s new payout policy of between 30% and 40% of underlying profits reflects this and means that from this year, Santander’s yield will be much lower than we’ve become used to:

Bank

2015 forecast yield

RBS

0.3%

Banco Santander

3.2%

Lloyds

4.0%

Barclays

4.2%

HSBC

6.0%

Santander’s cash dividend payouts will also be subject to Spanish withholding tax.

Despite this, Santander isn’t a bad bank for long-term investors — its size and global diversity remain attractive, in my opinion, especially if you are keen on exposure to South America.

However, there could be more downside, and I believe there are more appealing options elsewhere in the banking sector.

Best bank buys?

For income investors, I believe HSBC is very attractive — it is well capitalised, globally diversified, and pays a reliable cash dividend.

For value investors, Barclays remains my pick. The UK bank’s shares currently trade around 20% below their net tangible asset value, despite a year of stable results and falling impairment charges.

Ultimately it’s your choice — and it’s worth noting that for investors with a long-term horizon, this week’s news could be a decent buying opportunity.

It’s certainly true that banks remain a complex sector for investors to understand — and there’s no guarantee that UK banks will be able to meet analysts’ bullish forecasts for 2015.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »