Buy Banco Santander (STD)
I don’t know when the euro debt crisis will be over or when European stocks, particularly European bank stocks, will stop sinking like stones. Certainly investors aren’t out of the woods yet: Fitch Ratings downgraded Spain to AA today (finally), for example.
But I do know that with a yield of 9.5% today, May 28, Banco Santander (STD) is paying me quite handsomely to wait.
Whenever you see a yield this high, you know that the market thinks there’s a lot of risk in a stock. The Spanish economy is a mess and the government’s efforts at cutting its budget deficit haven’t convinced anyone that the country is serious about fixing its problems.
But Spain represents just 24% of Banco Santander’s earnings and the bank has been extremely good, so far, at managing credit risk in Spain. In fact, the Spanish banking crisis has shifted to the regional banks, the cajas. Just this week the Bank of Spain took over CajaSur and I’m sure more takeovers are in the cards since these banks decided to step up lending as the real estate market plunged in an effort to gain market share. (That market share is now set to shift back to the big banks like Santander.)
Banco Santander’s biggest profit center in the first quarter of 2010 was Latin America (35% of profits) with the biggest share of those profits (21% of total bank profits) coming from Brazil. The bank also got 17% of its profits from the United Kingdom and has a growing business in the United States (2% of profits).
That profile buffers Banco Santander from the worst danger facing Spain-only banks—that the cost of capital will rise in Spanish financial markets. Santander is able to tap capital markets in Latin America, the United Kingdom, and the United States, so it doesn’t face that risk.
In other words, I think the market is over-estimating the risk in Banco Santander shares. And, while these shares are by no means riskless, at 9.5% the yield is more than adequate compensation for the real level of risk in the stock.
As of May 28, I’m adding these shares to the Jubak Dividend Income portfolio.
Full disclosure: I own shares of Banco Santander in my personal portfolio.
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This is an interesting pick, but the 11.5% yield Jim cites is a bit misleading. Each year STD gives a boosted dividend in April that is quite a bit bigger than the other 3 quarters. Calculating the annual yield based on this special dividend is incorrect. The trailing 12 month yield at current prices is closer to 8% which is still nothing to sneeze at, but I’m not sure it justifies the extra risk from the Spain and UK operations. I like the exposure to Latin America and if the price drops another 10-15% over concerns in Spain I’d be interested, but not at the current price.
I’m in. Like the yield, and plan to hold until Jim sells. It feels like a contrarian buy, but that is when I have done the best in the past.
alphasigmookie, actually I think we’re both wrong on the yield. I think you have to take the special dividend into account. Santander pays one most years recently. So if you look just at 12-month trailing dividends whatever they’re called, I get a yield of 9.5% at the current price of $10.30 a share.
The stock has already had its Death cross.. not a good buy.. 200 day EMA crossed 50 day EMA on rising volume on down trend.
http://febsee.blogspot.com/2010/05/death-crossstd-banco-santander.html
STD is my single largest holding, twice of a full position, bought three times because of the high yield and global coverage . Unfortunately, I bought too early. They all are underwater. The earliest purchase is now my biggest loser! But I have decided to hold on! This buy recommendation makes me feel BETTER!
BTW, this is the first time I ever went over the limit on any single stock, it’s a crash! Discipline!
I don’t particularly like the symbol for this stock…
There was a post from southof8 on the post where STD originally was mentioned. Does anyone have answers to these questions raised? I have similar concerns, but am intrigued by this contrarian idea.
“Has anyone been able to determine how much it holds in Spanish Gov or corporate bonds, or other European government bonds that are weakening? That’s my concern- if the bonds crash, the bank crashes. (the one overriding lesson of the MBS crash in 2008.)
I’d love to own it. Can anyone offer insight on its balance sheet (and off balance sheet holdings ala Citi in 2008- the opaque shit nobody knew about because they were parked in off balance sheet SIVs)? “
Banco Santander (STD): Greek government bonds EUR200 million in its ALCO bond portfolio, PortugalEUR3.3 billion in government bonds, SpainEUR24 billion in government debt.
Thanks DKE. That’s 28.5 billion in PIG debt. Can you give us the total assets or a ratio?
Does STD mark to market? or Do they value their holdings at whatever they think some norwegion village’s pension fund might pay because Moody’s says its bonds are AAA?
Yahoo lists the yield at 9.5%, scottrade and MSN list it at 11.2%. However if you go through and add up the individual dividends over the past year I get 0.84 which is only a yield of 8.1%. For the year before I get 0.90 which would be 8.7%. I can’t find any 1 year period where the total amount of the dividends would result in either of the yield values listed. The higher value matches what you get when you assume the April dividend would be repeated for the next 3 quarters, which seems unlikely based on past history. It is possible that the 9.5% value is based upon a total announced dividend for the current fiscal year, but I have been unable to find anything confirming this. Frankly it’s all a bit confusing and illustrates the importance of doing DD, and some of the challenges with investing in foreign companies.
What is the tax on dividends for non-citizens?
If a bank is paying 11% interest – how do they make money? Do they charge the lendee 12%? in a country with 20% unemployment?
how do they make money? i don’t have money i unemployment ,investor only my dream .people send email tell me i rich but i thing i know more i belive more i have to pay for the credit card now i just want to know more market and every thing thank for your website information
Spanish withholding tax is 18%.
Jim,
How about Credit Suisse? According to Barron’s the potential hit to equity from the PIIGS is 10% for Swiss Banks at .75/$1. They have a good dividend, ~5%, and a low P/B of 1.4 if you consider their private banking and asset management business. ROE 22% and Tier I ratio of 16.4. Jim where is the hair?
I bought STD 6 months ago for the dividend, then sold for a small profit. Those #s were Buy @ 17.10 & Sold @ near 18. Bought back in 1 month ago @ 11.80, again, for the dividend. Will hold it this time until Jim says he will sell his. What enhanced dividend in April are people mentioning here?
Jim,
Thanks for this recommendation. I have been considering a financial stock to add to my portfolio during the recent correction. I completely eliminated financials from my individual stock portfolio last November. While I continued to own the sector through my mutual funds, the exposure was significantly underweight when compared to the market as a whole.
Until now, I have been strongly considering BAC or JPM. STD was in my watch list, but the price had not been updated since last November.
The stock looks attractively valued, with a PE ratio and price-to-cash flow below most other financials, with very nice growth potential. The price-to-book ratio is also attractive at nearly 1.0.
I agree with you – I think the market has overestimated the risk to this stock. Depending on what the future holds for the Euro, my target price for this stock is $16.50+/-3.5. The low end of the estimate would be if the Euro hits parity with the dollar. If this were to happen, the real yield for the stock would also decline towards 7.5%. Still a nice deal.
I think I may have found a new contrarian play to replace my previous contrarian play in RYN.
Thanks again for your hard work and genuine effort to share your knowledge. You could certainly earn more if you took a job on Wall Street, but you choose to do this instead. I admire your work and decision to do what you do.
Good Morning…
How will the downgrade of Spain’s rating from AAA to AA affect STD stock?? Just curious as to how you folks are thinking…
How are taxes on cap gains, etc., handled for an ADR stock when the stock is owned in an IRA?
Bought in this morning at $9.18 – hoping the risk pays off and the dividends hold up.
Watch out for the S&P index. The key support lies at 1068 followed by 1041. We might already be in bear territory. Having banks in your port folio might not be a good idea in this environment.
you still like this PIG Jim, what are we down, 15%?
New investor guy here who has put some faith into the Banco Santander pick by Jim. With news today of the impending bid from Santander to buy a larger bricks and mortar presence in the U.K. for $1.8B, what do you think the overall impact of this will be to the share price in the short term if the deal were to go through?
Their is a 19% withholding tax by Spain on dividends. You can get around this by taking by reinvesting your dividends. The question is if this is a smart move with Spain looking to continue to be a mess economically? Jim please comment!
OK, just got a call from my broker and it looks like STD is paying a dividend of just 1% in November 2010. $.129502 per share/10.25 per share=.01233 dividend. Is this what every expected?