The shareholders of Wells Fargo & Company (WFC) will now have more reason to feel pleased. According to the CFO’s recent statement in the Wall Street Journal, the company will seek approval for a dividend rise and share repurchases at the time of submitting its capital plan for Federal Reserve’s fourth round of stress test in January 2012.
Since the financial crisis, it’s the second time that Wells Fargo is trying to enhance shareholder value. Earlier this year, the company was given the permission to raise quarterly dividend and authorize a share buyback program after clearing the third round of stress tests.
Consequently, in March 2011, Wells Fargo announced a special first quarter cash dividend of 7 cents per share, along with its regular quarterly dividend of 5 cents. Since then the company has been paying 12 cents per share as quarterly dividend.
On the other hand, in 2008, Wells Fargo’s board of directors had authorized the repurchase of up to 25 million shares of common stock. Furthermore, following Fed’s approval in March 2011, the company had authorized to repurchase another 200 million shares. As of September 30, 2011, the company has repurchased 81 million shares (exhausting the 2008 share buyback authorization and repurchasing 56 million shares from the current authorization).
However, Wells Fargo’s decision to seek approval from the Fed for dividend increase and share repurchase is in sharp contrast to what its peer, Bank of America Corporation (BAC) is trying. Bank of America’s plan to hike dividend in the second half of 2011 was rejected by the Fed in March. Since then, it has been working on strengthening its capital ratios and balance sheet by shedding its non-core assets.
Our Viewpoint
Profitability of most of the financial institutions is under pressure due to the sluggishness in the economy, lower interest rates and increased regulations. However, Wells Fargo seems to be confident about its capital strength. The company’s decision to return more value to its shareholders indicates that it has sufficient capital to meet Basel III capital requirements as well.
Currently, Wells Fargo retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we are also maintaining a long-term “Neutral” recommendation on the stock.
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