Falls in earnings per share (EPS) got steadily worse until things reached a bottom in 2012 with a 62% fall to just 23 eurocents. The dividend remained high, having peaked that year with a yield of 9.7%, but Santanders dividend policy has been unconventional to say the least more of that shortly.
The turnaround came in 2013, and for the year ended December that year we saw a 74% rise in EPS to 40 eurocents, and forecasts for the next two years continue the trend.
Back to earnings growth
For this December we have a 25% EPS rise on the cards, followed by a further 20% for 2015, taking Santander shares to a P/E of 10.7 this year and falling to 8.9 next year. That gives us PEG (P/E to earnings growth) ratios of only 0.4 for each of the two years growth investors typically look for 0.7 or less.
Thats a modest valuation by traditional standards, but why? And will Santander live up to expectations?
At Q3 time things were looking good, with new chairman Ana Botn telling us that Profit growth in 2014 helped consolidate the earnings recovery, thanks to improving revenues, falling costs and less need for write-downs.
All in all, progress looks set to satisfy this years forecasts with no real problems.
But what about that very high dividend yield?
Traditionally, Santander shareholders have taken their dividends as scrip, so new shares are issued with no need to hand over the actual cash. But that dilutes future earnings over more and more shares, and thats really not a sustainable strategy in the long run.
But Santander is recognizing that and is reducing its dividend. Theres a modest 3.2% cut forecast this year, followed by a further 13% shave next year to 50 eurocents per share which would provide a yield of 7.6% on todays share price of 535p.
That will leave dividends covered by earnings for the first time since 2011 (and then barely), and will represent a move towards a more conventional dividend policy ideally a companys dividends should be geared towards a balance of scrip and cash, so the two groups of shareholders are able to take what they want without any excessive balancing being needed.
Growth worth buying?
On the whole, I like the look of Santander these days, providing we see further cuts to its dividend in the coming years.
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Alan Oscroft 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.