This one might seem counterintuitive since EU banks aren’t exactly a pillar of health right now. But the clouds have started to part — and more importantly, Europe’s central bankers and politicians are intent on propping up the financial system.
And as we saw in the rebound of Bank of America and Citigroup, you can’t get more low-risk than a “too big to fail” lender with the full weight of the government behind it, can you?
Here’s why I like Santander (NYSE:SAN):
A Global Powerhouse: Santander is the largest eurozone bank by market capitalization. While there are short-term fears of continued debt crisis and economic troubles as even EU stalwart Germany slips closer to recession, unless you think a systemic failure is in order, it will eventually pay to have scale in Europe. Maybe not in 2013 or 2014, but eventually, Santander will have a powerful reach. Consider that Spain is only 15% of Banco Santander’s business with a lot of earnings coming from the rest of the EU, including Britain, as well as roughly half of profits coming from fast-growing Latin American markets like Mexico and Brazil.
Protected by the ECB: European Central Bank President Mario Draghi has been unequivocal of his support for eurozone banks and has pledged support through thick and thin. Couple that with reports that a host of European banks are paying back crisis-era loans from the ECB and you can see that even if Santander has some unforeseen difficulties, there is a big central bank with the will and the means to back it up.
Recent Writedowns: As Dan Burrows wrote for InvestorPlace.com, Santander had good news/bad news last week as it shored up its balance sheet by writing off some $26 billion in bad loans. The losses are hardly something to cheer, but it indicates that the bank is willing to admit defeat on a lot of its current portfolio. The result is a short-term anchor on SAN stock — including a 12% decline in the last week or so — but the prospect of putting the bad debt behind it at last and moving forward unencumbered now that the losses have been recorded. In short, earnings can only go up from here.
Giant Dividend: Like many foreign companies, Santander pays a volatile dividend that changes quarter to quarter. But based on annualizing the last four payouts, ranging between 14.75 cents and just over 23 cents, Santander has a roughly 9.1% dividend yield! Even if the low-water mark of 14.75 cents itself is annualized, the yield is about 7.7%. While the dividend might not seem sustainable in the light of recent losses and writedowns, Santander earned 82 cents in fiscal 2011 and $1.24 in fiscal 2010, so simply a return to the rather lackluster conditions of just a few years ago makes meeting the dividend very doable.
Buy Under $7: Santander’s price is a third of what it was in mid-2008. It’s down 36% in the last two years, including a double-digit plunge in the past few days. So it’s safe to say that calling a bottom here will be mighty difficult and that momentum still is clearly to the downside. However, barring the depths of EU shenanigans in mid-2012, it hasn’t dipped below the $6 mark since a brief period during the bear market lows of March 2009. I think $6 is the floor and would consider adding a position under $7 on a pullback. Sure, a lot can still go wrong with the eurozone … but what don’t we already know about? Not only is general EU uncertainty baked in by now, but the specific losses at SAN are now priced in. That means now could be a good time to stake out a position for a long-term, dividend-fueled ride in Banco Santander.
- Is AIG “Americas Improved Giant?” (The Economist)
- If you want to linger on the mistakes of the past, here’s the “true cost” of the AIG bailout, according to James Tilson and Robert E. Prasch. (The Big Picture)
- Wells Fargo says it busted its butt for a massive mortgage market share. (Bloomberg)
- Dan Burrows thinks SAN is a buy after the writedowns. (InvestorPlace)
- Why Brazil is the most important part of Santander operations. (MercoPress)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a positioni n any of the stocks named here.