Editor’s note: This column is the latest update in our Best Stocks for 2014 contest. Bryan Perry’s pick for the contest is Banco Santander (SAN).
The Wall Street Journal reported last Monday that the Bank of Spain, which oversees the regulatory affairs of its member banks, is pressing banks to conform adjusting scrip dividends (meaning dividends paid in full and fractional shares of stock) to levels that would align with cash dividends that fall in line with Tier 1 capital ratios of at least 11.
To that end, Banco Santander (SAN) has been paying out a scrip dividend this past year that is equivalent to a 6.4% yield after paying foreign withholding tax. The objective was to preserve cash to support its capital ratios. If and when SAN is forced to adjust its scrip dividend to match what it would pay on a cash basis, the dividend yield drops to 1.6%.
I am concerned that, with the deterioration of Europe’s recovery and the recently announced measures by the European Central Bank, net interest margin at SAN will come under pressure; that would impact its capital ratios, which in turn risks a cut in the scrip-dividend payout. The option of cash or scrip shares has allowed SAN to retain profits while its shares have appreciated, returning 13.7% to Cash Machine subscribers in less than a year and far outpacing the major averages year-to-date.
As the WSJ notes, at present Santander’s 10.9% lags the minimum threshold — and if a majority of investors opted for a cash dividend in the next quarter, it would be a “real problem.” I don’t like the way this is shaping up, given Europe’s slump and the fact that SAN stock is beginning to weaken technically. I’m not pleased to be exiting my Best Stock for 2014 pick, but it’s the right thing to do at this time. Take profits and sell SAN at market.
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Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and up to 4x greater income.
