Why Wells Fargo Stock Deserves Investor Attention
Despite what happened in the last financial crisis, bank stocks generally have a decent reputation among income investors. Even though many banks—including some of the biggest names in the industry—cut their dividends during the last downturn, they have largely grown their dividend streams back up to pre-crisis levels.
One of the top dividend growth stocks in the banking sector is Wells Fargo & Co (NYSE:WFC). The company reduced its quarterly dividend rate from $0.34 per share to $0.05 per share in 2009. But since 2011, management has raised the payout every single year. (Source: “Stock Price and Dividends,” Wells Fargo & Co, last accessed August 20, 2019.)
The latest dividend hike came in July, when Wells Fargo’s board of directors declared a quarterly cash dividend of $0.51 per common share. The amount represents a 13.3% increase sequentially and an 18.6% increase year-over-year. (Source: “Wells Fargo & Company Increases Common Stock Dividend and Increases Common Stock Repurchase Authority,” Wells Fargo & Co, July 23, 2019.)
The reason why the year-over-year change was different from the sequential change was that the company had already raised its payout earlier in 2019. That means, during the past year, WFC stock investors were rewarded with two dividend hikes.
And yet, shares of Wells Fargo haven’t exactly been hot commodities. Over the last 12 months, Wells Fargo stock has tumbled more than 20%.
That was quite a drop, considering that Wells Fargo is a mega-cap stock commanding nearly $200.0 billion of market capitalization.
The neat thing is, a company’s dividend yield is calculated by dividing its annualized cash payout by its share price. In the case of WFC stock, we have a larger numerator divided by a smaller denominator. The end result is that the company offers a much higher dividend yield than before.
With Wells Fargo trading at $44.68 apiece, the company’s newly-increased dividend rate translates to an annual yield of 4.6%.
And keep in mind that the average S&P 500 company pays just 1.95% at the moment. So essentially, investors who purchased WFC shares today would be locking in a yield that more than doubles the benchmark’s average. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed August 20, 2019.)
Wells Fargo & Co Dividends Backed by Wide Economic Moats
One thing I always check—even for solid dividend-growth stocks—is whether the company can actually afford its payout. But before we go into the numbers on Wells Fargo, I want to point out that the company’s dividends are backed by wide economic moats.
You see, with $1.9 trillion in assets, Wells Fargo is one of the largest financial institutions in America. The company has a strong focus on retail banking. While retail banking may not seem as exciting as wholesale banking, the business is more difficult to replicate.
In particular, Wells Fargo offers a wide range of products and services through 7,600 branches, more than 13,000 ATMs, and offices in 32 countries and territories. (Source: “Wells Fargo Reports $6.2 Billion in Quarterly Net Income; Diluted EPS of $1.30,” Wells Fargo & Co, July 16, 2019.)
If someone wants to copy Wells Fargo’s success, they would need to build an equally expansive branch chain network and convince customers to switch.
In other words, the retail banking industry has high barriers to entry. Looking around, there are only a handful of companies that compete in the same league as Wells Fargo. And that’s one of the reasons why the bank has been around since 1852 and is still making money hand over fist.
Of course, stocks often decline for a reason. In the case of Wells Fargo stock, there have been some concerns about how the contracting yield curve could hurt the bank’s business.
But here’s the thing: Wells Fargo has left such a wide margin of safety in its dividend policy that the company should have no problem continuing to return cash to investors even if its business slows down.
Just take a look at the financials and you’ll see what I mean. In 2018, the company generated diluted earnings of $4.28 per share while declaring and paying total dividends of $1.64 per share. That resulted in a payout ratio of 38.3%. (Source: “Wells Fargo Reports $6.1 Billion in Quarterly Net Income; Diluted EPS of $1.21,” Wells Fargo & Co, January 15, 2019.)
In the first six months of 2019, Wells Fargo’s diluted earnings came in at $2.50 per share. Its dividends, on the other hand, totaled $0.90 per share. Therefore, the company had a payout ratio of 36% in the first half of this year. (Source: Wells Fargo & Co, July 16, 2019, op. cit.)
If you’ve been following this column, you’ll know that, as a conservative income investor, I prefer to see companies pay out less than 75% of their profits in dividends. Looking at Wells Fargo’s numbers, the company’s low payout ratio suggests that the dividend has been quite safe.
Bottom Line on WFC Stock
At the end of the day, don’t forget that Wells Fargo & Co has been buying back its shares, which is another method of returning cash to investors. In the second quarter of 2019, the company bought back 104.9 million shares of its common stock. Net of issuances, that reduced Wells Fargo’s period-end common shares outstanding by 92.4 million, thus allowing each remaining investor to own a slightly larger portion of the company.
Going forward, Wells Fargo plans to spend up to $23.1 billion in stock buybacks from third-quarter 2019 through second-quarter 2020.
Add it up and you’ll see that, despite its lackluster share price performance, Wells Fargo stock remains a top pick for investors looking for high yield and dividend growth.