In a filing with the Securities and Exchange Commission (SEC), Wells Fargo & Company (WFC) announced that it would redeem $3.2 billion of trust preferred securities (TRUPs), as a part of its capital plan submitted to the Federal Reserve. The redemptions will be funded with the company’s excess cash.
In January 2011, WFC submitted a capital plan to the Federal Reserve Board, including dividend hike, common stock repurchases, the redemption of certain trust preferred capital securities and the continued open market repurchases of common stock warrants.
WFC was one of the 19 banks that were subjected to “stress tests” conducted by the Federal Reserve. Due to the recession, the Fed had put restrictions on increasing banks’ dividends and share buybacks in exchange for the bailout money. Following the repayment of the bailout money, many banks started putting pressure on the regulators to let them restore their dividends.
These banks, including big names such as JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) and Citigroup Inc. (C), needed to show that they had adequate capital to address potential losses over the next two years under various scenarios.
The action followed the Fed’s approval of the capital plan on March 18, which would definitely boost investors’ confidence.
Last week, WFC’s board of directors also approved a special first quarter 2011 cash dividend of 7 cents per share on its common stock. Combined with a quarterly dividend of 5 cents per share declared in January 2011, the special dividend brings the total dividend to 12 cents. The board of directors also augmented WFC’s share repurchase by an additional $200 million.
This marks the strength in WFC’s business model, reflecting the company’s commitment to return value to shareholders with its strong cash generation capabilities.
We believe that with its diverse geographic and business mix, WFC is well positioned compared to its peers. The Wachovia acquisition and the demise of some of the smaller players facilitated the company to garner a larger share in the mortgage markets.
Yet, the recent financial regulations are anticipated to negatively impact the company’s top- and bottom-line results. Besides, costs associated with loan resolutions and loss mitigations are also expected to remain elevated in the near term.
WFC currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.
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