Is this a good time for investors to add to their holdings in Spains largest bank which offers a prospective yield of more than 7% or is there worse to come?
Lets start with the basics: how is Santander valued against its past earnings, and the markets expectations of future earnings?
|P/E ratio||Current value|
|P/E using 5 year average adj. EPS||12.1|
|2-year average forecast P/E||12.3|
Source: Company reports, consensus forecasts
Santanders current forecast P/E of 12.3 is in-line with its historical valuation, suggesting that the market is confident that the Spanish bank will continue to perform in-line with expectations.
AP/E of 12.3 doesnt look expensive to me, either, especially as Santandersprospective yield of more than 7% provides generous compensation for holding the shares.
What about the fundamentals?
Ive been deeply impressed by Santanders performance during the last five years. Its ability to generate cash and write off bad debts without cutting the dividend or requiring a bailout has set it apart from Spains other banks.
Admittedly the dividend is mostly paid in scrip form (ie, by issuing new shares) and its Santanders overseas operations that have generated the cash to provide for bad debts in Spain, but the banks resilience has been impressive, nonetheless.
The banks late Chairman, Emilio Botn, promised shareholders last year that we expect to regain our pre-crisis profit levels in the next three years ie, by 2016.
Do the banks fundamentals back up this claim?
|Metric||5 year compound
average growth rate
|Net Operating income||-2.8%|
|Normalised earnings per share||-17.5%|
|Return on equity||-17.2%|
*the amount paid in Euros has not changed, although its value in GBP for UK shareholders has fluctuated with the : exchange rate.
Source: Company reports
Its clear that Santanders profits and return on equity have plummeted over the last five years as it has been forced to write off billions of euros of bad debt. But expectations of a return to normal dont seem completely unreasonable to me in 2013, earnings per share rose by 71%, and the banks return on equity rose by 86%.
I believe Santander is an attractive buy in todays market, although investors should be aware of the exchange rate risk involved in owning the banks shares. Santanders share price (in euros) has risen by 4.5% so far this year on the Madrid Stock Exchange, but the banks London-listed shares are down by 1%.
Of course, exchange rate fluctuations can work in your favour, too, but its important to understand how this factor could reduce your dividend income, if the pound continues to gain strength against the Euro.
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Roland Head 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.