Hold Wells Fargo Stock Even If a Dividend Cut Is Imminent

The spread of the novel coronavirus has, understandably, caused a number of investor fears to proliferate. The main fear, naturally, is a share-price decline. But for owners of banking assets like Wells Fargo (NYSE:WFC) stock, there’s also the fear of dividend-yield cuts.

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Not to discount these fears, but they may be overstated. A dividend cut is a possibility, but might not be as likely as some people think it is. And beyond that, Wells Fargo remains a banking-sector giant with enough capital to ride out the Covid-19 crisis.

All in all, Wells Fargo stock is cheap on a relative basis and looks due for a price recovery. The banking sector was hit hard as the new virus spread. Irrespective of the dividend, patient investors should anticipate enough share-price appreciation to warrant a stay-the-course approach.

No.1 on the Wrong List

In what might be called a dubious honor, Wells Fargo took the top spot on a list released by analysts at Keefe, Bruyette & Woods. Unfortunately, this isn’t the type of list that any business would want to be part of.

Those analysts, led by Christopher McGratty, acknowledged that dividend yields are “‘broadly safe’ for 90% of the banks, a sharp contrast relative to the [2008] financial crisis.” So, that’s the good news from McGratty and company.

So here’s the bad news. The aforementioned analysts compiled and released a list of 21 banks they deemed “potential dividend cut candidates.” I’ll let you take a wild guess as to which well-known bank was atop that list.

Yes, it’s Wells Fargo on top of the list. But it’s not on top because Wells Fargo’s in the deepest trouble financially. Rather, the list is ordered from greatest to least in terms of total assets. Thus, Wells Fargo earned the top spot on the list simply by being the biggest bank on it.

Besides, it appears that Wells Fargo is being punished for its generosity in this instance. Keefe, Bruyette & Woods analyst Brian Kleinhanzl declared that “WFC’s high payout ratio is the primary driver of investor fear that a dividend cut could happen.”

But dividend investors should appreciate Wells Fargo’s high payout ratio, not fear it. It’s not as if the company’s in jeopardy of going out of business. Wells Fargo survived 2008 and will easily survive the coronavirus crisis. And if the company wants to offer a generous forward annual dividend yield of 7.71%, what’s so wrong about that?

Go Where the Money’s At

There’s an old, bad joke that asks: Why do people rob banks? And the answer is: Because that’s where the money’s at. In the case of Wells Fargo, there’s enough money to last for quite a while.

Even Kleinhanzl concedes that Wells Fargo’s account won’t be depleted in the foreseeable future. “Ultimately, we believe that WFC has excess capital so the company can continue to pay dividends despite the prospect of not earning the dividend through net income,” he wrote.

Therefore, if Wells Fargo has a capital reserve that’s more than sufficient to weather the storm, value-focused investors ought to seriously consider a position in the stock. After all, it’s not very often that we see the shares trading at a trailing 12-month price-to-earnings ratio of just 9.34.

Further fueling the value argument is InvestorPlace contributor Mark R. Hake’s astute fiscal appraisal of Wells Fargo stock. He recently assessed the stock’s tangible book value per share (TBVPS) at $32.90. That implies substantial upside given the shares’ current price.

The Takeaway on Wells Fargo Stock

Even in placing Wells Fargo stock on top of its list of potential dividend cutters, Keefe, Bruyette & Woods analysts couldn’t maintain an entirely negative position on the company. List or no list, investors can simply ignore the critics and hold their Wells Fargo shares as a compelling value play.