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sagitarius84 (41.82)

Wells Fargo Joins the Crowd of Dividend Cutters



March 06, 2009 – Comments (4) | RELATED TICKERS: WFC , USB , PNC

Wells Fargo was yet another financial company to cut dividends today. Dividend Growth Investor readers have been warned about this one in January and as late as this Wednesday. The company’s board of directors cut the payment to 0.05/share from 0.34 in an effort to retain $5 billion annually. The statement by the president and CEO of Wells Fargo is pretty interesting to read:

“This was a very difficult decision but it’s absolutely right for our Company and our shareholders because it will further strengthen our ability to grow market share and to continue our long track record of profitable growth,” said President and CEO John Stumpf. “We will return to a more normalized dividend level as soon as practical. We have among the most loyal shareholders in America – individuals and institutions alike – and we’ve always recognized the value of dividends. Operating results for the first two months of the year are strong. Our ability to grow market share in this environment and to benefit from new business opportunities remains second to none. Our merger with Wachovia is on track and we remain as optimistic as ever about its potential benefits for all our stakeholders.”

The company’s dividend cut marks the end of a brutal week for dividend cuts in the financial sector, which started with PNC cutting its dividend early in the week. After that it was HSBC (HBC), which also announced plans to raise $17.70 billion from shareholders through a rights issue. US Bancorp (USB) was next by cutting dividends by 88%. Wells Fargo’s statement is another slap in the face for shareholders, as the company, just like US Bancorp, announced that it could afford the current dividend, but chooses not to in order to bolster its balance sheet and take advantage of opportunities.

WFC was one of the first companies to receive bailout funds from the Troubled Assets Relief Program. This dividend achiever has increased dividends for 20 consecutive years. The previous dividend of $0.34/share was well covered by earnings. Despite the rally in the shares, I would consider seling into strength. One could never tell if the company needed to cut the dividend or cut it because it knew it could get away with it.

Financial stocks used to be great dividend investments, but not anymore.As a result of all the dividend cuts in the financial sector, dividend growth investors that sold after the dividend cuts are now underweight financials. I am beginning to wonder if dividend investors’ long-term results would suffer in the event that financial stocks experience a rapid recovery once the current recession is over. Both US Bancorp (USB) and Wells Fargo (WFC) have expressed confidence in their ability to increase dividend in the future. I would continue monitoring the activity in the financial sector and look for dividend increases there over the next few years.

Full Disclosure: None

Relevant Articles:

- Can USB and WFC maintain their current dividends?
- TARP is bad for dividend investors
- US Bancorp (USB) cuts its dividend by 88%
- Yet Another Financial Company Cutting Dividends

4 Comments – Post Your Own

#1) On March 06, 2009 at 2:22 PM, sagitarius84 (41.82) wrote:

It is interesting to note that Warren Buffett didn't sell his shares of WFC in 4Q 2008, thus suffering huge paper losses on his investment. What he might have done is sell all of his financial exposure and convert it into prefered shares.

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#2) On March 06, 2009 at 11:54 PM, btown819 (89.48) wrote:

I wouldn't be surprised if Buffett added some to his WFC holdings recently.

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#3) On March 07, 2009 at 4:55 AM, lucas1985 (< 20) wrote:

I am beginning to wonder if dividend investors’ long-term results would suffer in the event that financial stocks experience a rapid recovery once the current recession is over.

I don't think so. In my humble opinion, investing in US financials at this time is like shooting in the dark: balance sheets are too complex even for seasoned accountants (my research time isn't unlimited), assumptions can be anything you want to imagine and political/regulatory risks are growing every day. The idea that common shareholders of most/all big banks will be wiped out is very real.

My advice: if you want/need exposure to the financial sector, do the following:

- Look for the middlemen. Exchanges, securities processors, clearing, investment advice. E.g., MORN, BR, NYX.

- Take more senior positions in the capital structure. Even preferred stocks are at risk.

- Take a look at the Canadian banks (for income investors)

Opening/keeping long positions in US banks/financials should be regarded as highly speculative.

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#4) On March 07, 2009 at 11:19 PM, Eudemonic (58.30) wrote:

Questions for those who are familiar with WFC. Is this the same WFC as described in the book "Good to Great" by Jim Collins?

Is WFC still practicing business today as they were when this national bestseller published?  Given the current economy, and the fact that the stock price may or may not be an accurate reflection of the company's true value, how does WFC stand in its industry? Is WFC still a great company? (Great being the best company in its industry)




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