Shares in Santander (LSE: BNC) (NYSE: SAN.US) have delivered strong gains for investors during 2014. They are currently up 15% since the turn of the year, which is well ahead of the FTSE 100s gain of 1% during the same time period. However, there could be more to come from Santander and, moreover, shares in the bank could be worth buying for this major reason.
Income Potential
Shares in Santander currently yield a whopping 7.3%. Thats more than twice the yield on the FTSE 100 and above and beyond anything else in the UK banking sector. However, theres a little more to Santanders income potential than just a big dividend yield.
Thats because, at present, the bank pays out more in dividends than it makes in profit. In fact, dividend cover in 2014 is expected to be 0.86. Clearly, this is unsustainable in the long run, but income-seekers should still be very interested in Santander for two reasons.
Firstly, Santander is forecast to increase earnings per share (EPS) at a rapid rate. For example, the bank is expected to grow its bottom line by 22% in each of the next two years. This means that dividend cover should naturally rise above 1 (meaning dividends are at least matched by profit), which is good news for investors.
Secondly, Santander intends on reducing dividends per share by 9.5% next year. When combined with the forecast growth in earnings, this should mean that dividend cover is restored to a much healthier level of 1.15. The yield, meanwhile, looks set to fall to 6.6% (assuming the share price stays where it is). While less than the current 7.3%, its still hugely attractive and, more importantly, very sustainable.
Looking Ahead
An important consideration for income-seeking investors, alongside dividend yields and the sustainability of those dividends, is valuation. On this front Santander may at first appear to be somewhat overpriced. Thats because it currently trades on a price to earnings (P/E) ratio of 16, which is considerably higher than the FTSE 100s P/E ratio of 13.8.
However, when Santanders previously mentioned earnings growth rate potential is taken into account, the picture looks a lot different. For example, its price to earnings growth (PEG) ratio is just 0.7 and this indicates growth is on offer at a very reasonable price. Indeed, with huge income potential available at an attractive price, Santander could be well worth adding to your portfolio.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
