Don't look now, but one of the most generous dividend raisers this earnings season was a bank. Specifically, it was Wells Fargo (WFC -0.03%), one of this country's Big Four lenders.
Following the Federal Reserve's annual stress tests, the bank wasted no time declaring its latest dividend raise. It's a substantial hike, so let's explore it a little and see if it supports a buy case for the company's stock.
The bank dividend-raise champ
Wells Fargo not only declared that dividend raise, but also unveiled a new and enormous share-buyback program. We'll address the latter in a moment; as for the former, the dividend raise resulted in an enhanced quarterly payout of $0.35 per common share.
That's nearly 17% over the previous amount, making it hands down the most substantial dividend raise among the four biggest U.S. banks. JPMorgan Chase, by comparison, has said it will soon hike its payout by 5%. And around the time of Wells Fargo's declaration, Bank of America and Citigroup enacted dividend increases of 9% and 4%, respectively.
Wells Fargo is likely feeling flush these days because it's a good time to be a big, traditional bank. With the recent moves by the inflation hawks at the Federal Reserve, interest rates have risen notably. That's been a boon for lenders like Wells Fargo that can charge more for credit while generally keeping intact the microscopic rates they pay for customer deposits.
Sure enough, this bank's net interest income has been rising sharply. In its most recently quarter, Wells Fargo reported robust year-over-year growth of 29% in this all-important line item.
Other metrics went in a similar direction, with total revenue increasing by 20% to $20.5 billion and net income rising a whopping 57% to more than $4.9 billion. Although average loans outstanding didn't rise by such an impressive amount, it did increase, advancing by 2% over that one-year stretch.
It's hard to overcome history
Yet there are several negatives that damp the positive elements of Wells Fargo's recent performance. Chief among them is that the bank continues to operate under a $1.95 trillion asset cap imposed by the Fed in early 2018. The regulator felt it necessary after a series of scandals plagued the bank in the late 2010s.
Although management has talked grandly about putting these ugly incidents behind it, the bank might not necessarily be succeeding. In early August, the Fed slapped Wells Fargo with yet another penalty for yet another infraction. The bank was ordered to pay $125 million after employees in its investment advisory unit were accused of using personal messaging to conduct official company business.
To be fair, this was part of a broader crackdown on banks and their failure to follow record-keeping rules; other lenders were cited and fined, too. Still, at this point, Wells Fargo should have more sense and discipline, and should be keeping itself in the good graces of regulators.
Another factor to consider is that, when matched against its peers, Wells Fargo doesn't have a muscular investment banking operation helping to power its fundamentals higher (and provide financial cushioning for rainy days). It's more exposed to consumer behavior: people taking out the loans and mortgages it provides by the bucketful. If the Fed's interest increases start taking a bite of consumer spending, Wells Fargo might take a hit.
A good effort, but...
So perhaps one or several of these factors inspired Wells Fargo to raise its dividend so assertively and launch a big new share-buyback initiative (which, at a total authorized amount of $30 billion, is nearly 20% of its current market cap).
Can these moves win back investors and help the bank repair its still-damaged reputation from the scandals? I think it will take more than what the bank has offered up so far.
First, the new dividend yields 3.2%. That almost exactly matches Bank of America's enhanced payout, but is notably behind the 4.8% of struggling Citigroup. It beats JPMorgan Chase's theoretical 2.7%, yet not by all that much.
Second, in contrast to Wells Fargo, those other three lenders are more diversified. Therefore they look better positioned to benefit in the boom times and withstand economic storms. They also don't have such a recent history of scandal. No matter how huge a share-buyback program or generous a bump in its shareholder payout, it's hard to make up for a lingering erosion in trust.
So while Wells Fargo's dividend increase is indeed large, and therefore tempting, the wisest move might be to pass on it. Other buys in the banking sector, and in the wider financial services industry, look better at the moment.
