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Consider This Before Buying Banco Santander, S.A. (BME:SAN) For The 6.4% Dividend

Simply Wall St

Could Banco Santander, S.A. (BME:SAN) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

A high yield and a long history of paying dividends is an appealing combination for Banco Santander. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Banco Santander for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

BME:SAN Historical Dividend Yield, January 22nd 2020

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Banco Santander paid out 54% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

Remember, you can always get a snapshot of Banco Santander's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Banco Santander's dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was €0.63 in 2010, compared to €0.23 last year. The dividend has shrunk at around 9.6% a year during that period. Banco Santander's dividend has been cut sharply at least once, so it hasn't fallen by 9.6% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Banco Santander for its dividend, given that payments have shrunk over the past ten years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. It's not great to see that Banco Santander's have fallen at approximately 4.4% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Banco Santander's payout ratio is within an average range for most market participants. Earnings per share are down, and Banco Santander's dividend has been cut at least once in the past, which is disappointing. To conclude, we've spotted a couple of potential concerns with Banco Santander that may make it less than ideal candidate for dividend investors.

Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 17 analysts we track are forecasting for the future.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.