Wells Fargo’s $33 Billion Capital Return Plan Is A New Record For U.S. Banks, But It Comes At A Price To Investors

Wells Fargo (NYSE:WFC) is looking to return almost $33 billion in cash to shareholders over the next twelve months – a record for any U.S. bank, and slightly better than the $31.5 billion capital return plan posted by its larger peer JPMorgan after the Fed released results for the annual stress test for banks late last week. Wells Fargo will hike its quarterly dividends from the current level of 39 cents a share to 43 cents a share, which works out to total dividends of ~$8.3 billion assuming average outstanding shares of 4.85 billion. Taken together with the new $22 billion share buyback program, this equals the record $32.8 billion payout. Notably, this represents a 73% jump compared to the bank’s plan to return $19 billion last year.

A key reason behind the sizable payout hike is that Wells Fargo’s relatively conservative business model helped it perform better than peers (many of which have larger investment banking operation) in this year’s stress tests. However, the much larger-than-expected share repurchase plan can be attributed to the Fed’s growth restriction on the bank. As Wells Fargo cannot grow its balance sheet until it fixes its internal governance issues (which is likely to take at least all of this year), it is paying out excess cash to investors which would have otherwise been used to expand its operations. The large one-time payout, therefore, comes at the price of no real growth for Wells Fargo in the near to medium term despite upbeat economic conditions.

We capture the trends in Wells Fargo’s dividend payout as well as share repurchases over the years in an interactive dashboard, along with our forecast for these key metrics.

Wells Fargo’s Historical Capital Returns

Wells Fargo has had an enviable track record among the country’s largest banks in terms of capital payouts over the last decade, 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. Although Wells Fargo reduced its dividend payouts in the wake of the downturn, dividends declared were almost at the pre-recession levels as early as 2013. Since then, the bank has hiked dividends slowly each year to reach the current figure of 39 cents, and will look to increase it to 43 cents from Q3 2018.

Over the last ten years, Wells Fargo has returned $99.6 billion in cash to common shareholders, an average of almost $10 billion a year – representing about 62% of its average retained earnings of $16 billion for this period. Notably, the bank has paid roughly an equal amount to shareholders through dividends and share repurchases.

The chart below details Wells Fargo’s total shareholder payouts for each year since 2012, and includes our forecast for the next four years.

A Detailed Look At The Payout For 2018

Wells Fargo’s capital plan for 2018 includes an increase in quarterly dividends from 39 cents a share to 43 cents starting from Q3 2018. So the bank will pay $1.64 in total dividends per share for full-year 2018 (representing a decent dividend yield of 3% given the current share price of ~$56). Considering the bank’s 4.9 billion outstanding shares, this works out to roughly $8 billion in dividends. As for the share repurchase plan, Wells Fargo had approval to buy back up to 71 million shares at the end of 2017, and its board authorized the repurchase of another 350 million shares in January 2018 for a total of about 420 million shares. The bank repurchased 70 million shares in Q1 2018, and we expect it to have repurchased around 80 million more shares in Q2 2018. Assuming an average repurchase price of $55, this works out to total repurchases of around $8.25 billion. Combined with $12.25 billion in repurchases over the remaining two quarters (half of the announced $24.5 billion figure), total repurchases for 2018 should be around $20.5 billion. Taken together with the dividends for the year, this represents a total payouts of $28.5 billion for the year – or 120% of the $23.8 billion in net income we forecast for the bank this year. This figure is clearly not sustainable in the long run, with balance sheet growth restrictions playing a major role in this elevated payout.

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.

If you don’t agree with our forecast, you can come up with your own by making changes to our interactive dashboard for Wells Fargo’s dividend payout and share repurchases.

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