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sagitarius84 (26.46)

Wells Fargo (WFC) – show me the money

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April 16, 2009 – Comments (4) | RELATED TICKERS: WFC , BAC , USB

                                                           Original Article

Last week Wells Fargo (WFC) reported better than expected first quarter EPS of $0.55/share. If the company manages to maintain earnings at the current rate, the annual EPS would jump up to $2.20/share. That puts the forward P/E ratio at 9, which is pretty low, and makes the stock pretty attractive at current levels.

At the same time however Wells Fargo has cut its quarterly dividends from $0.34/share to $0.05/share. At the current stock price shareholders are getting a mere 1% yield. If things were really as great as the most recent quarterly report suggested, then the dividend should not have been cut so severely.

Dividends are typically real cash that companies pay out to their shareowners. Unlike earnings, which could be manipulated back and forth to show rosy sand castles, dividends are real cash that cannot be created out of thin air. Thus management commitment to a dividend policy of consistent increases shows confidence in the business model of the company and its ability to allocate cash flows effectively.

If the situation was that great at Wells Fargo, then the company doesn’t expect these record profits to be sustained over the course of the next few quarters, based off the severity of the dividend cut in March. Now some analysts would claim that the dividend cut was necessary in order for Wells Fargo either to have the cash to repay the treasury’s TARP money earlier, to maintain its Tangible Common Equity Ratio, or to conserve cash as financing is difficult to obtain during a credit crunch.

Even if management really believed that operating momentum is sustained and that annual earnings per share would grow at double-digit rates, unless the board decides to share the new prosperity with shareholders by raising the dividends or buying back stock, investors have few tangible options to profit from the prosperity. Of course stock prices could go higher if earnings go higher, but that’s not always the case. If you are betting on the greater fool theory to profit in the stock market however, you might join the crowd of 90% of active traders who consistently lose money. If you want to invest intelligently and not speculate blindly, you would pass Wells Fargo at this moment.

I do have high hopes for the company and would consider purchasing stock in it when the dividend growth policy is re-instituted. Until then there are many other opportunities for slow and steady total returns with much less risk considering.

Full Disclosure: None

Relevant Articles:

- The Dividend Edge
- Wells Fargo Joins the Crowd of Dividend Cutters
- TARP is bad for dividend investors
- Which Bank will be next? Follow the dividend cuts

4 Comments – Post Your Own

#1) On April 16, 2009 at 9:18 AM, sagitarius84 (26.46) wrote:

What is your opinion on Wells Fargo? Is it going higher from here or is it going to retest this years lows?

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#2) On April 16, 2009 at 9:36 AM, bigpeach (25.96) wrote:

I think they would like to pay a dividend, but companies that received TARP money are prohibited from raising their dividend until they pay the tax payers back. As a tax payer and not a WFC shareholder, I'm wholly in favor of this. If I were a WFC shareholder I would probably also support them paying back TARP first since I would like to see banks get out from under all the legislative restrictions.

I have no opinion on the short term moves for WFC, but I have made several long term bets on other banks.

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#3) On April 16, 2009 at 11:19 AM, wolfhounds (29.16) wrote:

I've been a customer of WFC for many years and a have a good relationship with the manager of the northeast mortgage office. In discussing the business with him recently as I was refinancing a 15 yr, 4 3/8%, he said that almost all the mortgages he was seeing were refi's. The first qtr report indicated that 75% of the mortgage business (that led to record profits) was from refi's. This can't keep up forever, nor does it help that almost all new mortgage business is from foreclose purchases at very depressed prices. That part of the business will continue for some time.

As soon as the TARP is repaid, WFC will resume getting it's traditional market spread. That means lower income on that spread and a portfolio size that is likely to be  much smaller for a number of years. In essence, looking at a P/E today says nothing about earnings power going out several years. WFC may be in a better capital position (but who really knows if they too will need to raise capital)than competitors, but at current levels the price may reflect too much optimism that all is well.

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#4) On April 16, 2009 at 9:30 PM, rd80 (97.59) wrote:

I've owned WFC since late '06.  My most recent transaction was a sell (bought some in the low 8's and it seemed like a good idea to get my money back and keep half the shares as freebies after the earnings pre-announcement).

I continue to think the long term prospects for WFC are very good.  If I was going to buy more, I'd wait for some piece of bad news to hit and see if I could pick it up cheaper.  Chasing good news in banks has been a massive losing strategy for some time now. 

I'm not happy to see my dividend payment cut, but I think it was the right choice.   In this environment having funds available to take advantage of firesales and getting out from under the government's thumb are more important than the dividend.

bigpeach - Companies that took TARP are not prohibited from raising their dividend.  However, they do need to get permission from their regulator and Treasury before a divvy raise.  That may effectively be the same as an outright prohibition, I don't know of any TARP recipients that have attempted to get a divvy raise ok'd.

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