Global Bank Wells Fargo Plans Dividend Cut in Response to Fed Stress Test

Katie Kao

After five consecutive years of boosted dividend payouts, San Francisco-based Wells Fargo (NYSE:WFC) plans to cut its dividend in the third quarter of 2020 in response to the Federal Reserve’s Dodd-Frank Act stress test that rates banks’ capital distributions.

Wells Fargo needs to add an additional 2.5% in stress capital buffer, or excess capital that the company must hold, to meet the requirements of the Fed’s Comprehensive Capital Analysis and Review (CCAR) results. The need to boost its capital buffer has resulted in the company’s decision to lower its $0.51 quarterly dividend, which would have converted to a $2.04 annual payout.

Wells Fargo has yet to announce how much its quarterly dividend will decrease but it is expected to be announced on July 14, 2020. Its share price fell to $25.60 the day after on June 30, 2020, and closed at $25.09 on July 1. In a short two-day time span, Wells Fargo’s stock dipped 2.4%.

Wells Fargo has maintained a continuous dividend payout since 1939 and it boosted its distribution each of the past nine years to produce an 8.13% forward dividend yield.

About Wells Fargo 

As a banking giant and multinational financial services company, Wells Fargo currently has a market capitalization of $104 billion and is the fourth-largest U.S. bank. Wells Fargo was among the financial service businesses whose earnings and assets were hit by the COVID-19 market crash.

The company reported a decrease in first-quarter 2020 revenue to $17.7 billion on March 31, compared to $39.3 billion for the same quarter a year ago. However, Wells Fargo was able to maintain its high liquidity coverage ratio of 121%. This denotes Wells Fargo’s good standing to pay its short-term obligations.

Credit to Paul Dykewicz for the photo.

Performance of Wells Fargo

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While Wells Fargo reported a drop in its total revenue for the quarter ended March 31, its noninterest expenses also decreased to $13 billion, down $868 million compared to March 31, 2019. This contributed to an overall net income of $653 million, lower when compared to the same quarter a year ago. The pandemic heavily impacted Wells Fargo’s net earnings during the quarter. However, the company continued to maintain its strong liquidity and capital positions.

Despite the lowered earnings, Charles W. Scharf, president and CEO of Wells Fargo, emphasized the important steps that the company has taken during the pandemic and its continued dedication towards customer needs. He acknowledged the company’s strong levels of capital and liquidity are cornerstones in enabling the bank to serve its customers and support the U.S. economy.

“I’m incredibly proud of the efforts across the entire company, particularly those on the front lines,” Scharf said. “We’re hopeful that our actions, those of others and especially government support should provide needed relief and help many customers bridge this difficult period.”

Wells Fargo Hires New Wealth and Investment Management CEO

On June 16, 2020, Wells Fargo announced Barry Sommers will join the company as its new CEO of Wealth and Investment Management, including Wells Fargo Advisors, Private Wealth Management and Wells Fargo Asset Management. This includes the reins of the company’s delivery of wealth management, investment, and retirement products and services to clients through its U.S.-based businesses. Sommers was the previous CEO of Wealth Management at JP Morgan Chase and began reporting to CEO Charles Scharf on June 22.

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Price / Book Ratio

Wells Fargo currently has a 0.30 price to book ratio, so it is trading for less than its book value. This is extremely rare and suggests that the market undervalues the company’s total asset values. This signals a potentially good investment opportunity and high future returns.

Price / Earnings Ratio

Wells Fargo also has a 3.49 trailing price-to-earnings (P/E) ratio, which is 84% lower than the overall S&P 500 P/E ratio of 22.27. This low P/E ratio suggests Wells Fargo is currently undervalued compared to other stocks in the S&P 500 and may achieve high earnings growth.

Recent Stock Price Performance

Wells Fargo’s stock price since the start of the year has fallen 25%, but it has climbed 44% from its low on March 23, as of July 1, 2020. Following the COVID-19 market crash, the stock slid from the $27 range in January 2020 to the $19 range in April 2020. Prior to this, Wells Fargo’s stock price had been decreasing since 2018 from its $42 range. Wells Fargo’s current stock price shows volatility and hovers around the $22 range.

The Company Keeps Promised Effort to Rebuild Homes

The company recently announced “Rebuilding Together,” a leading national non-profit organization that provides home repairs to individuals in need at no cost and revitalizes communities in the United States, as a part of the Wells Fargo Builds program. Wells Fargo is investing more than $1.3 million in Rebuilding Together for underserved communities throughout the country.

This announcement follows Wells Fargo’s $1 billion commitment to address U.S. housing affordability through 2025.

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Eileen Fitzgerald,the head of housing affordability philanthropy with the Wells Fargo Foundation, said, “We are committed to combining the company’s business expertise with philanthropic capital to make housing achievable for everyone. In collaboration with Rebuilding Together we will continue to fulfill our commitment to our most vulnerable and underserved communities.”

Reasons Why Wells Fargo is a BUY:

  • It is the fourth-largest U.S. bank and the fourth-largest bank in the world by market capitalization, despite lower performance this year due to the pandemic.
  • The company has a rare price-to-book ratio below 1, suggesting that Wells Fargo is currently undervalued by the market.
  • Wells Fargo has a trailing P/E ratio 84% lower than the S&P 500 average.
  • The banking company maintains dedication to housing affordability and serving communities with its $1 billion dollar commitment through 2025.

Some Key Risks for Wells Fargo Include:

  • Current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters, and any slowdown in global economic growth can affect the earnings of the company.
  • The effect of the current interest rate environment or changes in interest rates or in the level or composition of Wells Fargo’s assets or liabilities will affect its net interest income.
  • The decreasing stock price trend, aside from the COVID-19 dip, could signal poor recent performance in comparison to previous years.
  • Income investors should keep in mind that Wells Fargo announced it will cut its quarterly dividends starting in the third quarter of 2020.

 

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