In a press release issued yesterday, Wells Fargo announced its decision to raise its quarterly distribution to $0.25 per share, up 14% from a previous payout of $0.22 per share. According to the bank's chairman and CEO John Stumpf, "The dividend increase approved by our board today was included in our 2012 Capital Plan and reflected the confidence we have in our company's performance."
While this is great news in and of itself, as it increases the yield on Wells Fargo's shares to 2.9% at today's price, the forward guidance given by Stumpf was even better. Again, according to his prepared remarks: "We remain committed to returning more capital to our shareholders. We requested an increase in capital distributions in our 2013 Capital Plan as compared to our 2012 plan, subject to review and non-objection by the Federal Reserve Board."
As I've discussed previously, prior to the financial crisis, Wells Fargo paid out anywhere between 35% and 50% of its earnings to shareholders. It subsequently ratcheted that back during the financial crisis and has slowly been building it up ever since. In the third quarter of last year, for instance, Wells Fargo distributed only 23% of its quarterly net income via dividends. With the most recent increase, in turn, the payout will continue its upward climb, coming in at 27% relative to the bank's fourth-quarter earnings.
For long-term income investors, the question is, how much higher can Wells Fargo's dividend go? And the answer to this is: It depends. More specifically, it depends on how much the company decides to pay out and how much it earns. On the conservative side, I think its yield on today's price could grow to nearly 4%, assuming that its earnings from the fourth quarter stay flat, and that its payout ratio grows to 40%.
Speaking for myself only, a seemingly likely 4% payout ratio for an institution of Wells Fargo's quality is hard to pass up, particularly when other income-generating vehicles are yielding next to nothing thanks to the Federal Reserve.
Fool contributor John Maxfield owns shares of Bank of America. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.