A Closer Look at Banco Santander's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Banco Santander  (LSE: BNC  ) (NYSE: SAN  ) and assessing whether the company is an appetizing pick for income investors.

How does Banco Santander's dividend history stack up?

  2009 2010 2011 2012
FY Dividend Per Share 60 euro cents 60 euro cents 60 euro cents 60 euro cents
DPS Growth -4.8% - - -
Dividend Cover 1.8x 1.6x 1x 0.4x

Source: Banco Santander Company Accounts.

After cutting the annual dividend in 2009, the bank has kept the payout on hold since then, even though earnings per share (EPS) have continued to fall annually during the period.

The bank has suffered heavily in the aftermath of the 2008-2009 financial crisis owing to heavy exposure to the bombed-out economies of Europe, including the beleaguered Spanish property sector. This has subsequently driven dividend coverage far below the widely regarded security watermark of two times forward earnings, with last year's full-year payout actually outstripping EPS.

What are Banco Santander's dividends expected to do?

  2013 2014
FY Dividend Per Share 59.8 euro cents 54.5 euro cents
DPS Growth -0.3% 8.9%
Dividend Cover 0.8x 1.1x
Dividend Yield 10.9% 9.9%

Source: Digital Look.

Earnings per share are anticipated to rebound strongly in 2013 after years of consecutive losses, according to broker estimates, with a 118% increase pencilled in. This is expected to advance an additional 21% in 2014.

However, dividend payments are not predicted to rise in lockstep with this projected earnings recovery, remaining broadly stable in 2013 before dropping more noticeably next year. Dividend cover is projected to improve, albeit still substantially below two times forward earnings.

Santander aims to buck analysts' dividend projections for this year, saying in April that it is targeting a 0.60 euro cents full-year payment in 2013. The bank recorded net profit of 1.2 billion euros in the first quarter, representing 53% of the total for 2012, and said that profits should be "significantly higher" than the 23 billion euros seen last year.

How do Banco Santander's dividend prospects rate against the competition?

  Prospective Dividend Yield Prospective P/E Ratio
Banks 3.7% 13.1

Source: Digital Look.

Banco Santander was recently changing hands on a P/E readout of 10.5 for 2013, symbolizing a sizable discount to the broad average for its banking sector rivals. The firm also hammers its counterparts in terms of predicted dividend yield.

In my opinion, Santander is a stock market selection worthy of serious consideration by income investors. Although the eurozone continues to create earnings uncertainty, the effect of bad loan provisions and writedowns has moderated significantly from recent years.

Elsewhere, its retail operations are starting to pick up the pace -- customer deposits rose to more than 653 million years in January-March, up 4.2% from the fourth quarter -- while I expect its wide operations across developing regions, particularly Latin America, to undergird stellar earnings growth and carry dividends higher. In my opinion Santander's plus-10% prospective dividend yield is too good to pass up on.

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