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The Santander share price is climbing. Time to buy?

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Here in the UK, when we think of banking stocks, it’s easy to overlook Banco Santander (LSE: BNC). It’s listed on the FTSE 100, along with Lloyds Banking Group and Barclays, though its operations are mostly in Spain and South America. With the Santander share price down 12% in the past 12 months, I might buy.

The shares have been gaining in recent months, up 11% since a low in July. In fact, the whole banking sector has been quite resilient of late, despite the UK economy hitting a recession. Still, we’ve known a recession was unavoidable for a while now. And Santander should hopefully be more resistant to a UK economy downturn.

The recent Santander share price strength has dropped the forecast dividend yield a bit. But at around 4.5%, depending on which sources I look at, I think it’s an attractive one.

Dividend history

Santander cut its dividend in response to Covid, and partly restored it in 2021 to yield 1.6%.

In earlier years, Santander paid dividends in excess of its annual earnings. But as the majority of its Spanish shareholders took their dividends as scrip, the bank didn’t need to find the actual cash to cover payments. But there’s no such thing as a free dividend. And what shareholders gained in uncovered dividends, they lost in the resulting share dilution.

Thankfully, since Ana Botín took over as executive chair from her late father, Santander has adopted a more conventional dividend policy. Earnings have covered dividends quite strongly in recent years. And the modest 2021 payment was covered nearly nine-fold.

Valuation

The healthy forecast dividend yield gives me one reason to buy Santander shares. Looking from another angle, the stock’s price-to-earnings (P/E) ratio also makes it appear undervalued.

I’d hope 2022 forecasts are reasonably accurate at this late stage in the year. They put Santander shares on a P/E of only 4.8. Forecasts for the next two years are more uncertain. But they indicate steady earnings, which would keep the P/E down around the current level.

By comparison, we’re looking at a P/E of around 6.8 for Lloyds, with Barclays down at 5.5. The NatWest Group P/E stands at 8.5. Those all look very low to me too, especially considering the long-term FTSE 100 average is around the 15 mark. Even against the other UK high street banks, I think Santander looks cheap.

Buy Santander?

But if Santander and all the other bank shares are so undervalued, why isn’t everyone rushing out to buy them? Well, buying bank shares in the face of a possible multi-year recession will, no doubt, seem like madness to many.

I expect the sector to suffer a few years of financial pressure, lower earnings, and perhaps even reduced dividends. And I’d say low valuations are justified to some extent.

But I invest for the long term, not for the next two years. And I expect banks to make a profitable 10-year investment. I don’t know whether I’ll buy Santander yet. But I definitely intend to buy more bank shares before the recession is over.

The post The Santander share price is climbing. Time to buy? appeared first on The Motley Fool UK.

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Alan Oscroft has positions in Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.