Wells Fargo & Company’s (WFC) Board of Directors recently 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 increased dividend will be paid on March 31 to shareholders of record on March 28.
The Board also augmented WFC’s share repurchase by an additional 200 million. 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.
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. Prior to this revision, the company reduced its quarterly dividend by 85.3% (from 34 cents to 5 cents per share) in March 2009.
The action followed the Fed’s approval of a dividend increase and stock buyback after the completion of stress tests over banks’ financial positions.
WFC was one of the 19 banks that were subjected to “stress tests” conducted by the Federal Reserve. Due to the recession, the Fed put restrictions on increasing banks’ dividends and share buybacks in exchange of the bailout money. Following the repayment of the bailout money, many banks started putting pressure on the regulators to let them restore their dividends.
This long expected decision was a major milestone for the banking sector, signalling that the notified banks have fully come out of the effects of the financial crisis. This paved the way for these banks to reinstate dividends and buyback shares.
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.
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 smaller players helped it garner a larger share in the mortgage markets. Yet, the recent financial regulations are anticipated to have a negative impact on 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 its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Further, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.
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