Sell Banco Santander

04/29/2013 11:53 am EST


Jim Jubak

Founder and Editor,

I’m going to take advantage of the 2.8% bounce today in the ADRs (American Depositary Receipts) of Banco Santander (SAN) to sell the Spanish bank out of my Dividend Income Portfolio

The bounce came with news that CEO Alfredo Saenz had resigned and would be replaced by Javier Marin. Saenz faces legal problems stemming from a conviction dating back to 1994. In February the Supreme Court ruled that a pardon, granted to Saenz in 2011, went too far in allowing Saenz to work in banking despite the conviction that Saenz might be in violation of Spain’s “professional virtue” requirements for working in the industry. Saenz’s legal problems were just one more distraction that the bank didn’t need.

Especially since the bank’s last quarter was, from my point of view, a disaster. My rationale for owning Banco Santander even as the Spanish economy collapsed was that this global bank had more than enough strength in its non-Spanish operations to make up for problems at home. But results for the first quarter, reported on April 24, showed that just isn’t the case right now. The bank’s profitability in Spain was terrible, as expected and the bank’s ratio of non-performing loans continued to climb in the quarter, going to 4.12% from 3.84% in the fourth quarter.

But it was the weak performance of the bank outside of Spain that was a surprise and led me to this sell recommendation. My rule is if the reason you owned a stock is no longer true, then sell. And that seems to be the case right now with Banco Santander.

The biggest problem right now is Brazil. Non-performing loans edged up to 6.9% from 6.86% in the fourth quarter, but profit plunged as the country’s economy struggled. Profit in Brazil for the quarter came to 498 million euros down from 523 million euros in the fourth quarter. Mexico was strong but Chile was a train wreck with profits falling 24% from the fourth quarter of 2012.

I don’t think any of this puts the bank’s dividend at risk, but I think it does mean that the share price isn’t going anywhere. I wouldn’t sell here if Banco Santander were cheap, but it continues to trade at a premium to peers such as Banco Bilbao Vizcaya (BBVA) that have had stronger non-Spanish results in recent quarters. I wouldn’t sell here either if the economic weakness in Spain and Brazil seemed susceptible to quick solutions, but I don’t think that’s the case.

The price of the ADRs is down 27.99% as of the April 29 close since I added Banco Santander to my dividend income portfolio on May 28, 2010. Thanks to a hefty dividend, however, the position has just about broken even over that period. Once $2.83 a share in dividends is added to today’s price of $7.34, the total is not far short of my initial purchase price of $10.20.

Of course, the point was never to simply break even.

I think you can find a better dividend play than Banco Santander even in a market that has bid dividend stocks up to historically high valuations. I’ll be adding one to this portfolio in the next few weeks.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in Banco Santander as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at
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