Should I Buy Barclays PLC or Banco Santander S.A.?
Both Barclays (LSE: BARC) (NYSE: BCS.US) and Banco Santander (LSE: BNC) (NYSE: SAN.US) were casualties of the credit crunch, but unlike Lloyds and Royal Bank of Scotland, both have avoided the humiliation of large-scale state bailouts and cancelled dividends.
Indeed, Santander's 10.8% prospective dividend yield is one of the highest available from any company with a London listing, and is around five times greater than Barclays' 2.2% forward yield.
However, there is more to a share than its dividend yield, so which of these two banks looks the better buy today?
Barclays vs. Banco Santander
I'm going to start with a look at a few key statistics that can be used to provide a quick comparison of these two companies:
|Price to book ratio||0.81||0.71|
|12 month share price change||81%||29%|
Although Barclays and Santander have similar market values, they are very different businesses.
Santander's profitable UK and Latin American businesses have helped it maintain strong free cash flow over the last five years, and fund its EUR0.60 annual dividend, which has been unchanged since 2009.
UK-focused Barclays was forced to cut its dividend in 2008 and 2009, and while the payout is starting to rise again, last year's 6.5p payout is only half of the 11.5p paid in 2008.
On the other hand, Barclays' share price has risen by 81% over the last 12 months, while Santander has only gained 29%, due to investors' concerns about Santander's exposure to the troubled Spanish economy.
Although Barclays' recovery appears to be going well, it's worth noting that the British bank has net exposure to Spain of £23.8bn, including £13.6bn of residential mortgages. If the situation in Spain worsens, both Barclays and Santander may suffer further losses.
In the meantime, what can we expect?
Analysts' forecasts are notoriously unreliable, but FTSE 100 companies generally get the benefit of the most comprehensive analysis, and tend to deliver fewer surprises than smaller companies.
With that in mind, let's take a look at some forward-looking numbers for Barclays and Santander. These apply to the companies' current financial years:
|Forecast P/E ratio||9.5||9.3|
|Forecast dividend yield||2.2%||10.8%|
|Forecast dividend growth||11.5%||0%|
|Forecast earnings growth||n/a||120%|
These figures suggest that Santander's profits will rebound this year, as the bank's management expect bad-loan provisions to fall after last year's EUR18.8bn write down.
Barclays also expects steady improvement in earnings this year, which is expected to translate into an 11.5% increase in the bank's full-year dividend.
Which share should I buy?
Neither bank looks outrageously cheap, and both trade on near-identical P/E ratios. Given Santander's 10%+ dividend yield, the Spanish bank may seem like an obvious choice.
However, Santander's high yield represents the real risk that Spain may yet be forced to leave the euro or partially default on its sovereign debt. If this happens, then Santander would suffer heavy and unpredictable losses -- and for this reason, I would probably choose to buy Barclays.
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