Wells Fargo’s Capital Plan Looks Like An Attempt To Attract Investor Attention

by Trefis Team
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Wells Fargo & Co.
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Late last week, Wells Fargo (NYSE:WFC) broke with its tradition of announcing a vague capital return plan at the end of the Fed’s annual stress test cycle by clearly spelling out how much cash it wants to return to investors over the next twelve months. The banking giant will hike dividends marginally from 38 cents a share to 39 cents a share starting from the current quarter, and will also put in place a new share repurchase program to buy back shares worth up to $11.5 billion through Q2 2018. While Wells Fargo discloses its proposed dividend hike each year after the Fed’s stress test results are released, it usually remains tight-lipped about its share repurchases. Last year, all it revealed was that it will “provide returns within its target net payout ratio range of 55-75%.

We believe that a primary reason for additional capital plan details this year was to attract the attention of investors. Wells Fargo has drawn a lot of criticism from lawmakers as well as investors since its fraudulent account opening scandal came to light last September. With the bank struggling to regain customer trust, investors have slashed the premium which Wells Fargo’s shares have demanded since the downturn. By detailing its intention to return well over $19 billion in cash to shareholders – comfortably making this the bank’s largest payout figure ever – Wells Fargo also appears to be sending a clear signal that its underlying business model remains strong.

That said, the payout was largely around what investors expected, as is evident from the fact that Wells Fargo’s shares have been trading at around $56 since the announcement, after rising 6-7% over the first half of last week. We maintain our $57 price estimate for Wells Fargo’s shares, which is slightly higher than the current market price.

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. Wells Fargo’s quarterly dividend payout was 35 cents a share in 2014 – slightly higher than the pre-2008 figure of 34 cents. Over the years, it hiked it slowly each year to reach the current figure of 38 cents, and will look to increase it to 39 cents from Q3 2017.

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

WFC_QA_CapitalReturn2017

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 $7.5 billion in 2016. The bank also sped up its share repurchases over the period, because of which the total cash returned to investors in 2014 reached a record high of $16.3 billion, before decreasing marginally in 2015 and 2016.

Wells Fargo’s capital plan for 2017 includes an increase in quarterly dividends from 38 cents a share to 39 cents starting from Q3 2017. So the bank will pay $1.54 in total dividends per share in 2017. Considering the bank’s 5 billion outstanding shares, this works out to roughly $7.7 billion in dividends. As for the share repurchase plan, Wells Fargo’s board authorized the repurchase of 200 million shares in October 2012 and another 350 million shares in March 2014, with the Federal Reserve ratifying the move on both occasions. With these plans running over multiple years, the bank had remaining authority to buyback 215 million shares as of the end of Q1 2017. At current market prices, the bank could spend almost $12 billion to repurchase these shares. The bank spent $3 billion to repurchase shares in Q1 2017, and we assume a similar figure for Q2. Combined with $5.75 billion in repurchases over the remaining two quarters (half of the announced $11.5 billion figure), total repurchases for 2017 should be around $11.75 billion. This works out to total payouts of almost $19.5 billion for the year – representing 90% of the $21.8 billion in earnings we forecast for the bank 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 modifying this chart.

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