Wells Fargo (NYSE:WFC) just reported its first-quarter earnings on Tuesday. Since there was no dividend cut, WFC stock looks very attractive with its present 6.8% dividend yield.
Earnings per share on a non-GAAP basis were 74 cents per share, including addbacks due to deteriorating economic conditions. In effect, this is enough to cover the regular 51 cents per share quarterly dividend.
This is very important to most investors. Yes, revenue and earnings were down. GAAP earnings were 1 cent, which is net income of $653 million. But investors want to know if they will still receive their dividends. If the bank had decided to cut the dividend, WFC stock would drop significantly.
So the 51-cent-per-share dividend, $2.04 annually, yields 6.8% at today’s price below $30.
Dividend Cut Not Likely In the Future
Recently, the Wall Street Journal reported that the Federal Reserve was not likely to force banks to suspend their dividends. The bank referred to sources who indicated that the upcoming June stress tests would likely determine the fate of banks’ dividends.
Part of the reason for this is banks were required to submit plans to the Fed by the end of last week. They had to show how they would weather a deep recession and maintain sufficient capital. One fear is that halting dividends now would cause worries about the solvency of the banking system
Moreover, this decision is strictly up to the five members of the Federal Reserve Board of Governors, not the presidents of regional Fed banks.
Many European banks have faced pressure to cut dividends, according to the Financial Times. But recently executives from Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) said they would not cut dividends. With today’s earnings release which mentioned no dividend cut, Wells Fargo seems to be doing the same thing.
The Share Buyback Suspension Won’t Hurt WFC Stock
Wells Fargo announced that it had suspended its share buybacks. This will not likely hurt WFC stock the way a dividend cut would have.
One reason is that the buyback program was much larger than the dividend program. For example, during 2019 Wells Fargo spent $24.8 billion on buybacks. But its dividend cost just $9.5 billion.
So by suspending buybacks, Wells Fargo is preserving a much larger amount of equity capital than the savings from a dividend cut. This will allow the bank to pass the stress test by the Federal Reserve which includes the dividend.
What to Do With WFC Stock?
The next big event in relation to the dividend for Wells Fargo is the June release by the Federal Reserve of the banks’ stress tests. This will show whether the Federal Reserve has decided to force Wells Fargo to suspend or reduce its dividend per share.
Moreover, it will also show whether or not Wells Fargo has enough capital to withstand a severe recession. So far, Wells Fargo has been able to pass these stress tests and still reduce its capital through massive share buybacks.
I suspect the Federal Reserve will continue to allow dividends but likely suspend buybacks at least through the end of the calendar year. Therefore, today’s dividend yield for Wells Fargo offers extremely good value for most value investors.
For example, a 6.8% annual yield compounded quarterly over three years provides the following return: 22.67%. Here did I calculate that figure? Each quarterly dividend of 51 cents provides a yield of 1.71% (i.e., $0.51 divided by $29.70).
This 1.71% yield compounds for 12 quarters (i.e. (1.017 ^ 12)-1), assuming the investor invests the dividend at the same price. This formula equals 22.67%. The realized yield may be a bit lower, depending on how fast WFC stock rises after this quarter.
Nevertheless, this is a very attractive prospective return on investment for most investors. Look to buy WFC stock at these attractive prices.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.