Fed's Growth Restrictions Force Wells Fargo To Loosen Its Purse Strings For Investors Yet Again

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Wells Fargo ( WFC ) recently detailed its intention to return $31.4 billion to its shareholder over the next twelve months as part of its 2019 capital return plan. Trefis has analyzed the trends in the bank’s dividend payouts and share repurchases over the last 5 years and has summarized expectations for the next three in an interactive dashboard, A Detailed Look At Wells Fargo’s Dividend Payout and Share Repurchases , where you can modify forecasts to see the impact of changes on the bank’s share repurchases and dividends over coming years. Additionally, you can also see more Trefis data for financial services companies here.

While Wells Fargo’s capital return plan is smaller in size than what its peers JPMorgan and Bank of America announced after clearing the Fed stress test last week, a key reason behind Wells Fargo’s elevated payout to investors over recent years is the asset cap imposed by the Fed on it in early 2018. As Wells Fargo cannot grow its balance sheet, it has had to defer plans to reinvest its earnings in potentially high-growth avenues (like credit cards & payments), and has instead been forced to return billions of dollars in cash to investors through dividends and share repurchases.

Wells Fargo’s Capital Return Plan (2019)

  • Under the new plan, Wells Fargo will hike its quarterly dividends by 13% – from 45 cents now to 51 cents a share beginning Q3 2019. This works out to total dividends of $8.3 billion assuming average outstanding shares of 4.11 billion.
  • The bank will also repurchase $23.1 billion worth of its common shares over the next twelve months.
  • The latest capital return plan of $31.4 billion over Q3 2019-Q2 2020 represents a 4% drop compared to the $32.8 billion in dividends and share repurchases Wells Fargo announced in 2018. This is understandable, given that the banking giant aims to resolve the issues that triggered the Fed’s enforcement order by the end of the year .

The chart below details Wells Fargo’s total shareholder payouts for each year since 2013, and includes our forecast for the next three years.

Historical Payouts

  • 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 till 2013.
  • Since then, the bank has hiked dividends slowly each year to reach the current figure of 45 cents, and will look to increase it to 51 cents from Q3 2019.
  • Over the last ten years, Wells Fargo has returned $122 billion in cash to common shareholders, an average of almost $12.2 billion a year – representing about 68% of its average retained earnings of $17.9 billion for this period.
  • Notably, the bank has paid $53.2 billion in dividends and $68.8 billion in share repurchase over the last decade.
  • While the above data would suggest that the bank has preferred share repurchase to dividends, the bank has actually focused more on dividends. The discrepancy can be attributed to the unprecedented $20.6 billion in share buybacks over 2018.

What To Expect In 2019

  • We expect total dividends to be around $8.4 billion, as the annual dividend per share will increase to $1.86 from $1.60 cents in 2018. Also, the bank has repurchased $4.8 billion in shares in Q1 2019 and is expected to have repurchased shares worth an additional $3.8 billion in the second quarter (remaining share buyback out of $24.5 billion approved in the 2018 capital return plan).
  • Taken together with $11.55 billion in proposed purchases for the rest of the year (half of the total proposed repurchases of $23.1 billion), the total share repurchases for the year are expected to be around $20.2 billion.
  • The total payout for the year is, therefore, likely to be over $28.4 billion – exceeding our forecast for the bank’s net income ($21.3 billion).

We factor in these payouts in our analysis of Wells Fargo in the form of an adjusted dividend payout rate (which is the total payout ratio), shown in the chart below.

Do not agree with our forecast? Create your own forecast for Wells Fargo by changing the base inputs (blue dots) on our interactive dashboard.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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