Banco Santander – A Large Bank Doesn’t Mean A Good One

Other operational risks include external frauds, practices with customers and failures in the business channels themselves. While not as prominent as credit-oriented risks, they are not to be taken lightly as a simple data breach can also end up in a costly settlement.

 

Source: Banco Santander’s 2018 annual report – Risk Management

SAN strong exposure to Latin America is a double-edged sword. If the economy goes well, SAN will thrive. On the other hand, it seems that we are heading towards a bumpy road in those countries. Over the next couple of years, I doubt this exposure will result in growth.

Valuation

Using the Dividend Discount Model (DDM) to give a value to a foreign stock is always a difficult task. Once converted into USD, SAN shows a hectic dividend policy. We have used data from Seeking Alpha ($0.30/year as of November 2019) to start our analysis.

Using conservative numbers, we get a fair value of around $4.50. Considering the hectic payment and the fact there are other great banks with a more stable business model, I don’t see the interest to invest in Santander.

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $0.30
Enter Expected Dividend Growth Rate Years 1-10: 3.00%
Enter Expected Terminal Dividend Growth Rate: 3.00%
Enter Discount Rate: 10.00%
  Discount Rate (Horizontal)  
Margin of Safety 9.00% 10.00% 11.00%  
20% Premium $6.18 $5.30 $4.64  
10% Premium $5.67 $4.86 $4.25  
Intrinsic Value $5.15 $4.41 $3.86  
10% Discount $4.64 $3.97 $3.48  
20% Discount $4.12 $3.53 $3.09  

Please read the Dividend Discount Model limitations to fully understand my calculations.

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Disclosure: We do not hold SAN in our DividendStocksRock portfolios.

Additional disclosure: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or ...

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