While most banks are slashing dividends and looking to raise capital, Wells Fargo (NYSE: WFC) actually raised its dividend in the third quarter of 2008. That's been a boon to the company's stock price. Sure, it's trading at less than one-third of its 52-week high, but it isn't on the precipice of collapse like its competitors are.But the Wall Street Journal says (subscription required) that the company should cut its dividend: "Wells's stock yields over 10%. Dividends, which cost $4.31 billion last year, deplete capital. Wells's ratios are hardly impressive as it is, and look anything but bulletproof in the face of rising credit losses and huge economic uncertainty."
I agree with that analysis but there's more. Even if Wells Fargo is well-capitalized, does it really make sense to be returning cash to shareholders in such a low-interest rate environment? If Wells Fargo's balance sheet is strong enough to finance $4+ billion per year in dividends without the potential for disaster, it seems like they'd be better off retaining that money and keeping an eye out for vulture opportunities.
Of course, shares of Wells Fargo would probably take a dip if the company decided to cut its dividend because people would assume that it's the next Citigroup (NYSE: C). But if Wells Fargo management were able to clearly articulate that retaining capital in order to take advantage of opportunities is in the best interests of long-term shareholders, it'd be a good thing to do.
Of course, shares of Wells Fargo would probably take a dip if the company decided to cut its dividend because people would assume that it's the next Citigroup (NYSE: C). But if Wells Fargo management were able to clearly articulate that retaining capital in order to take advantage of opportunities is in the best interests of long-term shareholders, it'd be a good thing to do.
Closing Bell: When We All Love the PIIGS (NBG, SQNM, PG, ERTS, KO)
Serious Money: Cheapest Stocks List Shrinks from 26 to 21
Chasing Value: Hasbro Earnings Makes My Point
Reader Comments (Page 1 of 1)
2-25-2009 @ 2:35PM
Gordon said...
I can not believe that someone is complaining about a company (Wells Fargo) raising their dividend. This is a sound company that has made sound investments. It is a company that is wellfunded. It has a great managerial staff. It's board is full of notables (Warren Buffett). This is a conficent company that know that it has a winning formula. It makes sense to give a dividend that is appropriate given the above facts.
Keep up the good work Wells Fargo!!
2-25-2009 @ 5:09PM
Debra said...
Wells doesn't need to "save" it's capital for acquisitions. At this point in time, assets are free. If you look at the Wachovia deal, not only did Wells not pay for those assets, I think - net/net - the government paid THEM to take Wachovia. I think they plan to run that strategy for a few years and it should work out nicely for them. The management team at Wells Fargo is an extremely thoughtful and strategic group.
2-26-2009 @ 12:52AM
jerrybland09 said...
I believe that since banks are having to change the way they do business,Then there should be a law making banks that issue credit cards pay its costomers the same interest rate should that customer Pre-Pay Money towards its Credit Cards. This would provide banks with more liquid capital and also make the banks regulate the interest rates it gets on its Credit Cards.
2-26-2009 @ 5:46AM
Dan Barnett said...
But WFC didn't make a December dividend payment, so in effect they already did do a dividend cut?
Does anybody pay attention to what the company management says anyhow?
3-04-2009 @ 1:06PM
teacher said...
If Wells Fargo drops its divident, it will certainly be seen as opportunistic and will be grouped together will all the large loser banks. Right now, it stands out as the only large bank with prudent management. If they preserve the divident, they will benefit tremendously in the long run. Think of all the pension funds and retirees who will flock to WFC as a safe long-term investment.