Over the past 12 months, the Santander (LSE: BNC) share price has dived. Since the end of June last year, the stock has fallen by around 10%, including dividends to investors, substantially underperforming the FTSE 100.
Over the past three- and five-year periods, the company’s performance isn’t much better either. Including dividends received, over the former, the stock has produced an annual return of 5.6% for investors, and over the latter, it’s lost an average of 6.7% per year.
What’s more, investors who have been patient enough to hold the Santander share price for a decade, have seen virtually no return on their money. Over that period, the stock has produced an average annual return for shareholders 0.3%, compared to a return of 9.5% for the FTSE 100.
To put it another way, since 2009, the business has underperformed the UK’s leading stock index by a staggering 9.2% per annum, even when including dividends to investors.
What’s happened?
This lacklustre performance suggests Santander’s growth has ground to a halt over the past decade, but that’s just not the case.
According to my research, over the past six years, the bank’s net profit has increased at an average annual rate of 13.3%, and earnings per share have nearly doubled from around €0.27 to €0.49. City analysts are expecting Santander to report earnings per share of €0.51 for 2019. Based on this target, the bank is trading at a forward P/E of 7.9, and it offers a dividend yield of 5.8%.
Its share price looks cheap on other metrics as well. For example, it’s trading at a price to tangible book ratio of just as 0.96. Technically, any company that’s achieving a healthy level of profitability should trade at or above tangible book value per share.
The question is, why is the market placing such a low multiple on this highly profitable, growing business?
It seems to me investors are just generally avoiding the European banking sector in general as they’ve been a poor investment since the financial crisis. Ultra-low interest rates have crippled their ability to earn healthy profits, and rising levels of bad debts have forced many of the continent’s largest banks to ask shareholders for more funds.
Fundraising
Santander hasn’t been immune from these pressures. In 2017, the company asked shareholders for €7bn to sort out Banco Popular’s finances after acquiring its domestic rival for the symbolic price of €1 the same year. Despite the capital raise, this deal has been a net positive for the bank and its investors. In Spain, its second-biggest market, net profit jumped 28% to €1.5bn during 2018 as its transformation of Popular started to yield results.
The integration is still progressing with Santander announcing today it has paid €937m to acquire the remaining 60% of Allianz Popular, the joint venture between global insurance giant Allianz and Popular. The combined business been selling insurance to the bank’s customers since 2011 and accounted for around 10% of Allianz’s overall gross written premiums in Spain.
Despite the price tag, I think this could be an excellent deal for Santander as it grows its presence in the company’s home market. I also believe this is yet another sign the stock is undervalued at current levels and could be worth your research time if you’re looking to add an undervalued income play to your portfolio.
