Author's note: Since this article was published, we learned Wells Fargo had come up short in a stress test by the Federal Reserve Board. Therefore it will have to cut back its dividends to meet capitalization requirements. In addition, it will be unable to repurchase shares for at least the remainder of this year. See my followup article, "Wells Fargo Faces a Forced Dividend Cut" for more details.
Thanks to the recent market meltdown, Wells Fargo & Co. (WFC, Financial) has become a dividend hotshot—at least temporarily. This one-year chart, showing the share price in blue and the dividend yield in red, illustrates what has happened this spring:
Wells Fargo is a historic institution, formed way back in 1852. In recent years, it has become famous as a bank bought by Warren Buffett (Trades, Portfolio) for Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). It also became notorious because of several scandals in the past decade.
When analyzing its dividend, we should be aware, as the company points out in its 10-K for 2019, that we are looking at dividends from dividends. In other words, the Wells Fargo dividend is based largely on the dividends paid to it by its subsidiary banks and other subsidiaries (wealth and investment management).
Whatever the case, the dividend results are robust, as shown in the GuruFocus Dividend & Buy Back table:
Dividend yield
Over the last four quarters, the bank has paid 51 cents per quarter or $2.04 annually. Divide the annual number by the current share price of $27.45 (at the close of trading on June 17) and the dividend yield works out to 7.42%.
The two green bars to the right of the Dividend Yield figure are both green, indicating the dividend yield is attractive when compared with its competitors and its own history.
GuruFocus reports: “NYSE:WFC's Dividend Yield % is ranked higher than 88% of the 1023 Companies in the Banks industry.’
Turning to its history, GuruFocus observes: “NYSE:WFC' s Dividend Yield % Range Over the Past 10 Years Min: 0.59 Med: 2.56 Max: 8.48 Current: 7.42”. At the end of December, before the pandemic and economic crisis, the yield was 3.57%.
The yield is just one of three metrics we consider when assessing a company’s attractiveness as a dividend stock, with the other two being the dividend growth rate and the payout ratio.
Dividend growth rate
The current dividend growth rate for the past three years is shown in the table, but the rate has varied over the past decade:
- Last 12 months: 17.10%.
- Last three years: 8.2% per year.
- Last five years: 6.20% per year.
- Last 10 years: 20.80% per year.
Dividend payout ratio
The payout ratio matters, too, because it tells us what percentage of the earnings per share (without non-recurring income) goes to shareholders. If the ratio becomes too high, then the company may be starved for funds to operate and grow the company.
The payout ratio shown in the table could normally be trusted, but for the first quarter of 2020, it should be approached with caution. In its first-quarter earnings release, Wells Fargo noted it was pulling $3.1 billion, or 56 cents per share, out of earnings to build a reserve fund. In addition, market and economic conditions led to an impairment of $950 million, or 17 cents per share.
If we look at the results for fiscal 2019 (ending Dec. 31), we get a similar, but more reliable, reading on the payout. For the year, the company paid $1.92 in dividends, while its earnings per share without non-recurring items was $4.05. Dividing the former by the latter, we get a payout ratio of 47%. That’s about half of earnings and should be sustainable.
Forward dividend yield
You will note in the table that the “Dividend Yield” and “Forward Dividend Yield” are identical. That’s because the most recent payment is the same as other recent payments.
The forward yield is based on just the most recent dividend payment; if it were higher or lower than previous payments, then the forward yield would be higher or lower, respectively.
Five-year yield-on-cost
This measure suggests what returns investors might expect if they bought shares today and held them for five years. It accounts for not only the current yield, but also the potential yield if the company continues to grow its dividends at the same rate as it did for the previous five years.
At the current price, the five-year yield-on-cost is 10.02%, which is quite attractive. This GuruFocus summary shows that the Wells Fargo yield is greater than those of 82% of its peers:
Buyback ratio
Share repurchases are a common alternative to dividends, paid out when a company wants to reward shareholders without increasing its dividend. Taking the buyback approach allows a company more flexibility since investors dislike reductions in dividends, but tolerate irregular repurchases.
The ratio itself is calculated by dividing the amount of cash disbursed for buybacks in a specific period by the value of market capitalization at the beginning of the repurchase period.
This, too, is valuable in comparing companies. Wells Fargo has a higher ratio than 98% of its peers:
Of course, buybacks only make sense if a company pays the right prices. As Buffett wrote in his most recent shareholder letter: “In past reports, we’ve discussed both the sense and nonsense of stock repurchases. Our thinking, boiled down: Berkshire will buy back its stock only if a) Charlie [Munger] and I believe that it is selling for less than it is worth and b) the company, upon completing the repurchase, is left with ample cash.”
According to its 10-K, Wells Fargo bought back 142,651,770 shares in the fourth quarter of 2019 at weighted-average prices ranging from $49.58 to $53.01. As a price chart for that period shows, it was buying back stock at close to market prices:
Conclusion
For potential buyers of Wells Fargo stock, the current slump provides not only a significantly reduced share price, but also a chance to get an excellent dividend of more than 7%. Of course, there may be other circumstances, as identified in a thorough due diligence analysis, that make the stock unattractive. Investors should consider all aspects of a stock, not just dividends, before buying.
With a five-year yield-on-cost of 10.02% plus potential returns from buybacks, the stock has much to offer before even considering potential capital gains.
For income investors, it is well worth further consideration.
Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.
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