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Will Banco Santander Brasil Help You Retire Rich?

Monday - 1/7/2013, 10:19pm  ET

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Europe has been in an economic crisis for years now, as debt woes have spread across the southern tier of the continent. Yet with many European companies having reached out to emerging markets in order to seek growth, international diversification has proven useful. Banco Santander Brasil marks one such effort from a major Spanish bank, but the stock's poor performance raises the question of whether the strategy is a sound one. Below, we'll revisit how Banco Santander Brasil does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Banco Santander Brasil.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$28.4 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.60

Pass

 

Worst loss in past five years no greater than 20%

(54.9%)

Fail

Valuation

Normalized P/E < 18

26.57

Fail

Dividends

Current yield > 2%

3.8%

Pass

 

5-year dividend growth > 10%

NM

NM

 

Streak of dividend increases >= 10 years

0 years

Fail

 

Payout ratio < 75%

110.9%

Fail

       
 

Total score

 

4 out of 9

Source: S&P Capital IQ. NM = not meaningful; Banco Santander Brasil had its U.S. IPO in October 2009 and paid its first dividend shortly thereafter. Total score = number of passes.

Since we looked at Banco Santander Brasil last year, the company has lost a point, as its payout ratio rose sharply. The stock has done even more poorly, falling about 10% over the past year.

Banco Santander Brasil is part of parent company Banco Santander's transatlantic empire, with the Spanish bank having also offered public listings for its Chilean subsidiary Banco Santander Chile . The offerings have given the Spanish parent a chance to raise capital without having to sell its own beaten-down shares.

But Brazilian banks have had a tough year, with Banco Itau and Banco Bradesco both having seen struggles. With the Brazilian central bank having cut interest rates sharply, private banks have had to reduce their interest rate spreads, threatening interest income and marking a major shift in thinking for a country that has traditionally had to deal with massive inflation. As Brazil's economy has slowed, default rates on consumer loans have risen, further cramping banks' bottom lines.

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