Federal Reserve Gives Wells Fargo Approval to Hike Dividend


After the closing bell yesterday, the Federal Reserve released the results of its 2013 comprehensive capital analysis and review, or CCAR. Unlike last week's stress tests, which were designed to ascertain whether the nation's 18 largest banks could survive a severe economic downturn, the purpose of the CCAR is largely to determine which of the same banks should be allowed to increase the amount of capital that they return to shareholders via dividends or share buybacks.

While there were notably few surprises, yesterday's announcement wasn't entirely void of them. The biggest shock, for example, was that the tried-and-true regional lender BB&T had its 2013 capital plan rejected by the Fed. To be fair, however, the reason for the rejection wasn't entirely clear at first. As my colleague David Hanson discussed:

Although the Fed did not object to the Winston Salem, NC-based bank's continuation of its increased dividend from the first quarter of 2013, the bank recently disclosed that it reevaluated its process related to calculating risk-weighted assets because of regulatory guidance. The change in methodology was not reflected in the Fed's numbers, prompting the objection and necessary revision.

Fortunately, a similar surprise wasn't in the cards for shareholders of the nation's fourth largest bank by assets, Wells Fargo . As it did during the stress tests, the California-based mortgage giant seemingly sailed through the CCAR process with little to no trouble. According to a press release issued soon after the results were made known, the bank confirmed that its 2013 capital plan includes a proposed dividend rate of $0.30 per share for the second quarter of 2013, and a proposed increase in common stock repurchase activity for 2013 compared with 2012. Both of which, of course, are contingent upon approval by the company's board of directors. By means of comparison, JPMorgan Chase has proposed a 26.6% dividend increase, while Bank of America is contenting itself with a $5 billion buyback -- click here to read more about JPMorgan's decision, and here for B of A's.

Source: Company press release.

As you can see in the chart above, Wells Fargo currently pays a $0.25 per share dividend each quarter -- equating to an annual payout of $1. The increase, in turn, would raise the annual payout by 20% to $1.20 and translate into a 3.25% yield at yesterday's closing price, making it one of the better-yielding banks in the market. In prepared remarks, CEO John Stumpf said that "We are extremely pleased to be able to reward our shareholders with increased distributions for 2013." Suffice it to say, shareholders are probably equally pleased.

Beyond this, the performance of Wells Fargo's capital base throughout both processes should give investors in California-based bank further reason to rest easy at night. At the end of the third quarter, the bank sported a Tier 1 common capital ratio of 9.9% -- or nearly twice the requisite 5% minimum. After being subjected to the Fed's "severely adverse" economic stress-test scenario, the rate fell to 7%. Although this amounted to a decline of 290 basis points, the hypothetical output was still 200 basis points above the benchmark figure. And once you remove the capital that Wells Fargo intends to distribute this year, the rate settles at 5.9% -- yet again above the necessary level.

Source: Comprehensive Capital Analysis and Review 2013: Assessment Framework and Results.

The biggest remaining question concerns the bank's plans for share buybacks. Unlike the dividend increase, which Wells Fargo clearly spelled out, it was much more coy about the size and timing of buybacks, saying only that the bank's proposal also included an "increase in common stock repurchase activity for 2013 compared with 2012." Last year, the bank's board approved the repurchase of 200 million shares of common stock. Consequently, it seems safe to assume that the same amount, if not more, will be approved this year, barring some unforeseen intervening catastrophe. But lest you get too excited about this, it's important to note that these buybacks are principally conducted to "cover shares repurchased to meet team member benefit plan requirements." In other words, don't expect the outstanding share count to go down anytime soon.

Following on the heels of a stellar year, Wells Fargo's performance in the Fed-administered tests over the last two weeks serves as evidence that not infrequently, the best bank investments are also the most boring.

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The article Federal Reserve Gives Wells Fargo Approval to Hike Dividend originally appeared on Fool.com.

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