Still relying on cash ISA? I think the Santander share price is a better buy

Banco Santander SA (LON: BNC) looks undervalued and is worth buying for income, according to this Fool.

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If you’re still relying on cash ISAs to help manage your money, I think 2019 should be the year you diversify your funds. Cash ISAs are a good way to save for the future, but with the best interest rate on the market today at just 1.5%, the returns are extremely depressing.

Instead of relying on the cash ISA, I would invest a portion of my savings in Santander (LSE: BNC).

Buying growth

In my opinion, the Santander share price has plenty going for it. For a start, at the time of writing, shares in the bank support a market-beating dividend yield of 5%. What’s more, I think the stock looks cheap right now as the shares are dealing at a forward P/E of only 8.5.

It’s difficult to understand why investors are not flocking to buy this stand-out financial enterprise. Usually, investors reward banks with a low multiple if there’s something that doesn’t look right on the balance sheet, such as rising loan defaults, or a poor capital ratio. However, I can’t see anything wrong with the group’s most recent set of results. 

Earlier this week, Santander reported an 18% year-on-year increase in profits for 2018, to a total of €7.8bn. Net interest income grew 5.3% to €9.1bn, the non-performing loan ratio declined from 3.9% to 3.7% in the fourth quarter, and is down 164 basis points since June 2017. At the end of 2018, Santander’s tier one capital ratio was a healthy 11.3%, above its own target of 11%.

Some analysts have questioned whether these results are as good as they seem because there were some hidden nasties in the numbers. For example, Santander was only able to grow profit in some regions due to cost reductions. 

These concerns are valid, but I don’t see them as a risk to the entire investment thesis. The group is trying to cut costs and improve its digital offering, which is generally cheaper to operate. According to Santander’s own numbers, a third of its products sales are currently made through digital channels and the number of digital customers increased by 6.6m to 32m during 2018.

Brexit worries 

So, financially at least, it looks as if Santander is a great investment. One thing that I think could be holding the share price back at the moment is Santander’s exposure to the UK and European economies, where a dark cloud in the form of Brexit is hanging over economic growth. 

A no-deal divorce will almost certainly impact the bank’s profitability. However, Santander is better positioned than most European financial institutions because more than a quarter of its profits are generated in Brazil. This exposure also helped the group escape the worst of the financial crisis, and I think it could provide a backstop once again in 2019 if Europe’s economy grinds to a halt or starts to contract.

As the Santander share price is currently trading at discount valuation, I believe the risk of a messy Brexit is already reflected in the bank’s share price. And with that being the case, I’m a buyer of the shares today because not only does the Santander stock offer a market-beating dividend yield, but there’s also the potential for significant capital gains if the business continues to grow in 2019 and defies its doubters. 

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.

Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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