Is Wells Fargo Stock A Buy After Dividend Hike Announcement? (NYSE:WFC)

Elevator Pitch

I have a Buy investment rating for Wells Fargo & Company’s (NYSE:WFC) shares. I did an earnings preview for WFC in my prior April 12, 2022 update. In this current article, I offer my updated views on Wells Fargo after the company’s recent dividend hike announcement.

I upgrade Wells Fargo from a Hold to a Buy after its announcement to raise its quarterly dividend. In my opinion, WFC deserves a Buy rating taking into account its dividends, long-term business outlook, and valuations.

WFC Stock Key Metrics

WFC issued a press release on June 27, 2022, highlighting that “it has completed the 2022 Comprehensive Capital Analysis and Review (CCAR) stress test process.” On its website, the Fed defines the CCAR stress test as a means of determining if “banks are sufficiently capitalized to absorb losses during stressful conditions.” Earlier, the Fed had released the results of the CCAR stress test earlier on June 23, 2022.

In the late-June press release, Wells Fargo disclosed its stress capital buffer or SCB, which it noted “represents a percentage amount of incremental capital the company must hold above its minimum regulatory capital requirements.” The company also provided other metrics and commentary relating to shareholder capital return in this recent media release.

WFC’s SCB was 3.2% as per the Fed’s 2022 CCAR stress test, which was better than expected.

The company had guided at prior investor calls that its SCB might go up in 2022. At its Q1 2022 earnings briefing on April 14, 2022, Wells Fargo mentioned that “our stress capital buffer could increase” based on an analysis of “the severity of the variables that went into” the stress test. WFC also commented at the recent Morgan Stanley (MS) US Financials, Payments & CRE Conference on June 14, 2022, that “it’s possible our stress capital buffer goes up, given the scenario that we had to deal with.”

In other words, investors had expected Wells Fargo’s SCB to rise in a meaningful way. But as it turned out, Wells Fargo’s SCB actually only increased very slightly from 3.1% in the prior stress test to 3.2% now, which was a positive surprise. This implies that WFC now has room to return more excess capital to its shareholders.

In its June 27, 2022 press release, Wells Fargo emphasized that it “has significant capacity to execute on common stock repurchases” in the next one year for the Q3 2022-Q2 2023 period. Notably, Wells Fargo didn’t buy back any shares in Q2 2022 which it attributed to “prudent management” in view of “volatility”, as revealed at the mid-June Morgan Stanley US Financials, Payments & CRE Conference. As such, it is encouraging that WFC has committed to resuming share repurchases going forward.

In the next section, I focus my attention on another key shareholder capital return metric (dividends) highlighted in Wells Fargo’s recent media release.

What Is Wells Fargo’s Dividend Now?

Wells Fargo’s current quarterly dividend per share is $0.25, which is less than half of its quarterly dividend payout of $0.51 per share prior to the COVID-19 outbreak.

It is noteworthy that WFC has decided to raise its quarterly dividend from $0.25 per share to $0.30 per share, as mentioned in the company’s June 27, 2022 media release. Wells Fargo’s 2022 SCB of 3.2% was decent, and it is clear that WFC is in a good position to gradually increase its dividends back to pre-pandemic levels over time.

Wells Fargo’s dividend hike is a major positive, especially compared with the other “Big Four” banks. Following the Fed’s 2022 CCAR stress test, Citigroup Inc. (C), and JPMorgan Chase & Co. (JPM) didn’t raise their respective dividends. On the other hand, Bank of America Corporation (NYSE:BAC) only increased its dividend per share by a relatively lower +5%. This means that WFC boasted the most substantial dividend increase among the “Big Four” banks after the recent stress test.

When Will Wells Fargo Increase Their Dividend?

In terms of timing, Wells Fargo has noted in its late-June press release that the increase in dividend will be reflected in the Q3 2022 payout.

In the subsequent section, I discuss how safe is Wells Fargo’s dividend.

Is WFC A Safe Dividend Stock?

Wells Fargo offers decent consensus forward FY 2022 and FY 2023 dividend yields of 2.7% and 3.3%, respectively. I am of the view that WFC is a safe dividend stock with the ability and willingness to sustain its dividend payouts for the foreseeable future.

The implied FY 2023 and FY 2023 dividend payout ratios for WFC based on consensus dividend forecasts are 26.5% and 26.2%, respectively. These dividend payout metrics don’t seem to be excessive, and they are below the mean consensus forward dividend payout ratio for the banking sector at around 32.9%.

Furthermore, Wells Fargo has the ability to optimize shareholder capital return as necessary. For example, WFC didn’t do any share repurchases in Q2 2022; the company can suspend buybacks in favor of dividends going forward if needed. In other words, Wells Fargo has the ability to pay out the dividends that the market expects.

More importantly, WFC has sent a clear signal that it places a strong emphasis on shareholder capital return, and it is very willing to return excess capital. Apart from raising the quarterly dividend per share as per its recent announcement, Wells Fargo had previously stressed at its Q1 2022 investor briefing that “the significant changes we’ve made across the company have put us in a position to increase the dividend and our work continues.” This suggests that Wells Fargo has the intention to eventually restore its dividend back to pre-COVID levels.

What Is Wells Fargo Stock’s Long-Term Outlook?

Wells Fargo has a target of delivering a sustainable Return on Average Tangible Common Shareholders’ Equity or ROTCE of 15% in the long run, as indicated at its Q1 2022 results call.

There are a number of drivers which will help WFC to achieve its 15% ROTCE goal.

In my earlier April 28, 2021 article for WFC, I have noted that “an asset cap was placed on the bank as a result of the ‘fake account scandal’” since 2018. The potential removal of the asset cap should be a big boost to Wells Fargo’s future ROTCE. But the asset cap has yet to be removed, and it is in the hands of the Fed to decide if and when this can happen.

Another driver, beside the removal of the asset cap, will be rising interest rates. Wells Fargo even highlighted at the recent June 14, 2022 Morgan Stanley US Financials, Payments & CRE Conference that “I don’t think we need the asset cap to be lifted to get to 15% (ROTCE), given where rates are projected to go.” This suggests that higher interest rates will be supportive of net interest income growth and an increase in ROTCE for WFC.

There is also room for WFC to optimize its expenses, which will also be a key driver of the increase in its ROTCE to 15% in the future. Wells Fargo had realized $4 billion of cost savings for 2021, and the company remains on track to achieve its $10 billion multi-year expense reduction target. WFC had guided at the Morgan Stanley US Financials, Payments & CRE Conference last month that it could possibly generate $3.5 billion in cost savings this year.

Is WFC Stock A Buy, Sell, or Hold?

WFC stock is a Buy.

Wells Fargo trades at a discount to JPM and BAC, as per the table below. I see WFC’s valuation discount to these two peers narrowing, as the bank’s ROTCE rises, as discussed in the preceding section.

Peer Valuation Comparison For The Big Four Banks

Stock	Price To Tangible Book Value Multiple	Consensus Forward Next Twelve Months’ Normalized P/E Multiple
Wells Fargo	1.13	8.3
JPMorgan	1.66	8.5
Bank of America	1.49	9.0
Citigroup	0.59	5.5

Source: S&P Capital IQ

I also like WFC’s recent dividend hike, and I think it can achieve its long-term ROTCE target of 15%. This makes Wells Fargo a Buy in my view.