It emerged today thatBanco Santander (LSE: BNC) (NYSE: SAN.US) is planning toraise $9bn 7.65bn from a share sales in order to bolster is capital position and fund expansion plans.
Additionally, Santander plans to use part of the cash to fund a cash dividend. The bank has traditionally paid the majority of its dividend as a script issue. (This is why Santander has managed to sustain its high dividend payout, which is currently equal to a historic yield of around 9%.) But now, Santander says it willdivide the annual payment to shareholders into three cash dividends and one scrip dividend.
Unfortunately, a higher cash payout has forced Santander tocut its 2015 dividend payout by two thirds, to 20 cents per share, against 60 centspreviously. For UK shareholders this implies that the banks dividend yield will fall to around 3%.
Under pressure
Santander and its newexecutive chairman Ana Botn, has been under pressure to bolster the banks capital ratio for some time now. Indeed, City analysts believe thatSantander has one of the weaker balance sheets among its European peers. Analysts believe that under Basel III rules, the banksfully loaded capital ratio is less than 9%, the lowest of European peers.
Still, in last yearsEuropean Central Bank stress tests, Santander fared better than many of its peers with itstier one capital ratio falling to only 8.9% after a simulated three-year period under stress. A ratio of 8.9% was far above the minimum requirement of 5.5%.
For long-term holders this announcement is good news. An additional $9bn will not only give Santander enough cash to strengthen its balance sheet but it will also give the bank plenty of financial fire power to expand.
New chapter
Todays announcement also marks a new chapter for Santander. Indeed, the bank has been going through somewhat of a transformation over the past six months afterEmilio Botn, who ran the bank for 28 years, died in September.
Emilios daughter,Ana Botn, took charge of the bank after his death and has started to shake things up. In November, Ana replacedCEO Javier Marin in November with finance boss Jose Antonio Alvarez who was seen as a rising star at the bank. And now the new management has decided to raise fresh capital, a move thats long been considered the right course of action but is something the old management failed to act on.
Not good news
However, for income investors, todays newswill come as a shock. Santanders dividend yield used to be one of the best around but todays cut means that the bank now offers a yield similar to that of its peers. Nevertheless, the additional capital and plans for growth should ensure that, over time, Santanders payout steadily increases.
So, while todays news is a shock, Santander is laying the foundations for long-term growth.
On the other hand, if you’ve decided toturn your back on Santander following today’s announcement, and you’re now looking for other high-yield opportunities, I strongly recommend that you readour guide to high-yield investing.
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Rupert Hargreaves 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.
