Will Wells Fargo's Earnings Send Markets Higher?

2013 is here, and earnings season has already started ramping up. The key to making smart investment decisions with stocks releasing their quarter reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

Let's turn to Wells Fargo (WFC -1.11%). The well-known bank is slated to report its earnings on Friday, so let's take an early look at what's been happening with the bank over the past quarter and what we're likely to see in its quarterly report.

Stats on Wells Fargo

Source: Yahoo! Finance.

Will Wells Fargo beat estimates again?
Wells Fargo had an excellent 2012 from a share-price perspective, as the company rebounded sharply from late-2011 concerns about the overall banking industry to post gains of more than 20% over the past year. More recently, though, the stock's performance has flattened out in the past three months, lagging behind many of its banking peers.

First and foremost, the key thing to remember about Wells Fargo is that it's intensely profitable. Writing one of every three mortgages in the country, Wells has a firm grip over the mortgage market, and unlike some other banks, Wells has been expanding home lending rather than pulling back.

One big area in which Wells Fargo has resolved some major issues is in legal liability from alleged mortgage improprieties. After a landmark settlement with the Department of Justice and dozens of states' attorneys general last year, a new settlement with the Federal Reserve and the Office of the Comptroller of the Currency was announced yesterday. A total of 10 mortgage services, including Wells Fargo and peers Bank of America (BAC -1.07%), Citigroup (C -1.09%), and US Bancorp (USB -1.49%), will pay a total of $8.5 billion under the settlement, with Wells Fargo paying $766 million in cash and another $1.2 billion for foreclosure prevention actions. Although that's an expensive way to resolve uncertainty, Wells Fargo will still benefit from having the uncertainty associated with the outstanding liability claims removed. Although that happened after the fourth quarter ended, look for comments from Wells Fargo management about the deal.

Investors are also looking for news about a possible dividend hike from Wells. Last year, the company raised its payout after its regular quarterly dividend in February, adding a special $0.10 payment in March to retroactively increase its total payout for the year. With a yield of 2.5%, Wells is already doing a lot better than Citi and B of A, but it may argue that it should be able to pay even more, given a payout ratio that's below its normal levels.

If Wells Fargo beats estimates by its traditional penny per share, then don't expect investors to be surprised. Anything more than that, though, could send the shares through the roof and inspire the entire market to feel more comfortable about the new earnings season. 

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