Fed Approves Wells Fargo’s $24 Billion Capital Return Plan For 2014

Wells Fargo’s (NYSE:WFC) investors received a pleasant surprise late last week when the country’s largest bank in terms of market capitalization announced plans to return a whopping $24 billion in cash to investors through a dividend hike and a large share repurchase program. ^[1] As an added bonus, investors were also assured that the huge payout will not impact the bank’s capital strength as the Federal Reserve approved the capital plan as a part of its annual review of banks.

Wells Fargo’s capital plan includes a 17% increase in quarterly dividends from 30 cents a share to 35 cents and an authorization to repurchase 350 million of its shares through Q1 2015. Considering the bank’s 5.2 billion outstanding shares, the dividends work out to roughly $1.8 bullion each quarter or $7.2 billion over the next four quarters. As for the share repurchase plan, Wells Fargo’s current market price implies that the bank will spend at least $17 billion to repurchase 350 million shares over the period. To put the magnitude of the repurchase plan in perspective, Wells Fargo bought back shares worth less than $5.5 billion over the course of 2013. ^[2]

We are in the process of updating our $50 price estimate for Wells Fargo’s shares in view of the better than expected returns for the year.

See our full analysis for Wells Fargo’s stock here

Wells Fargo has had an enviable track record as one of the country’s largest banks, as it emerged from the economic downturn at roughly double its previous size – unlike most peers, who were forced to slash several parts of their business model over the period. This has shown in the bank’s dividend payout over recent years, with Wells Fargo’s current dividend payout of 30 cents a share each quarterly being close to the pre-2008 figure of 34 cents.

The table below summarizes Wells Fargo’s capital return figures for each year since 2005, and has been compiled using figures reported in annual reports:

As can be seen from the table above, Wells Fargo has increased dividends aggressively since 2010, with the figure jumping from just over $1 billion in 2010 to almost $6 billion in 2013. The bank also sped up its share repurchases over the period, because of which the total cash returned to investors in 2013 ($11.3 billion) was just shy of the figure in 2007 ($11.4 billion) – before the downturn resulted in the bank taking a more cautious approach with its cash.

But the decision to buy back as many as 350 million shares – about 6.6% of its outstanding shares – came as a surprise due to the sheer magnitude of the repurchase plan. After all, the highest amount of cash Wells Fargo has set aside for share repurchases in its history is the $7.4 billion figure for 2007, and the expected cost of $17 billion for implementing the 2014 plan is a good 140% higher. It should be mentioned that such a large share buyback comes with a notable concern – the bank could end up over-paying for its own shares over the course of the year.

Also, the proposed 35-cents per share quarterly dividend will boost the total dividends paid by the bank over the Q2 2014 – Q1 2015 period to around $7.2 billion. This means that the bank is looking to return between $24 billion to $24.5 billion in cash to investors over this time frame. Given the fact that we estimate Wells Fargo to report net income of around $23 billion for the calendar year 2014, we are looking at a total payout ratio of more than 100% this year.

We include dividend payouts as well as share repurchases in our analysis of Wells Fargo in the form of an adjusted dividend payout rate as shown in the chart below. You can understand how a change in the bank’s adjusted dividend payout affects its share value by making changes here.

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1. Wells Fargo Receives No Objection to its 2014 Capital Plan, Wells Fargo Press Releases, Mar 26 2014 [↩]
2. Wells Fargo Receives No Objection to its 2013 Capital Plan, Wells Fargo Press Releases, Mar 14 2013 [↩]