A Spanish Fiesta: Banco Santander's (STD) 10% Dividend Yield

The Euro Zone financial crisis has been well covered in the media of late. Greece received a bailout from the European Union at the last minute, while concerns continue to mount that Portugal, Ireland and Spain will be next. The problem really is an elementary one: countries have been spending more than they make, and that, coupled with declining economies, has resulted in a real live sovereign debt crisis.

Stocks have been sold across the board and the euro currency has dropped precipitously against the dollar and other world currencies. Over the past four months the euro itself has declined 20% against the dollar.

Clearly there are problems in the euro zone. However, investors by their nature are fickle and tend to paint everything in a troubled region with a brush. Given the strong selling we have seen in the financial markets, are there any quality companies available for conservative dividend investors which have been unduly sold down?

One such company is Banco Santander (STD), the Spanish based banking giant. The company trades on the New York Stock Exchange, has a market capitalization of $90 billion, and is currently yielding 10.65%. Yes, that’s right, over 10% in dividends. At the current price of $10.98, it’s trading at close to its 52 week low.

Banco Santander (STD) is the fourth largest bank in the world by profits and eighth by stock market capitalization (at the end of 2009). In 2009, its net profits were over EUR 8.9 billion (over $11 billion), 1% more than the previous year, and it distributed more than EUR 4.9 billion (over $6 billion) in dividends to shareholders. The company has more than 91 million customers its 13,660 branches, the largest branch network in international banking. It is also one of the most efficient banks in the world, with a cost-to-income ratio of 41.7%.

Santander’s (STD) geographical diversification is evenly balanced between developed and emerging markets. Its presence is concentrated in 9 major markets: Spain, Portugal, Germany, the UK, Brazil, Mexico, Chile, Argentina and the US, and in most of these markets it has attained high market shares in retail banking. The company’s levels of bad debt and coverage are better than the sector average in the geographical areas in which the bank operates. In addition, Santander (STD) is one of the most solid and solvent banks in the world, with a core capital ratio of 8.6% in 2009.

The bank is also growing in popularity in the mutual fund industry. According to MarketWatch.com, over 800 U.S.-based mutual funds have exposure to Spain. A total of 807 U.S.-based mutual funds hold $30.2 billion in Spanish stocks, with banks, telecoms and retailers making up the top spots. Some $10 billion in 460 funds is held by Banco Santander (STD), or 33% of all US mutual fund exposure to Spanish stocks.

Despite the economic headwinds occurring in the company’s home market of Spain, the latest quarterly results made for some rather surprising reading (at least to those who sold down the company’s shares). According to a Business Week report, “First-quarter profit rose 5.7 percent as growth in Brazil and the U.K. countered the Spanish slump. Santander is relying on its Brazilian bank, a unit with a market value as big as Deutsche Bank (DB), and its growing U.K. business as Spain’s worst recession in 60 years curbs domestic credit demand and drives up loan defaults. Santander has been “very active” in gathering funds to cover its financing needs, lining up 30 billion euros in deposits and 15 billion euros in debt issues in the first quarter to cover long- and medium-term debt maturities of 29 billion euros in 2010, Chief Executive Officer Alfredo Saenz said in a statement today. The bank’s financing position looks “very comfortable” through 2011, he added. Bad loans climbed to 3.34 percent of total lending from 3.24 percent in December and 2.49 percent a year ago”.

The dividend for 2009 is actually below the dividend in 2008 and 2007 in euro terms ($0.74 in 2009, and $0.80 in both 2008 and 2007). The dividend is up 45% in dollar terms since 2005.

One area to watch is the dilution of stockholders due to the issuance of shares. There were 8.6 billion shares in issue at the end of 2009 which represents a 17% dilution from 2008, and a 38% dilution from 2005. Shares were issued mainly to raise capital for the bank and ensure provisions for credit losses were strong enough to withstand the poor Spanish and euro economies.

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