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Wells Fargo & Co. (NYSE:WFC) rose sharply on June 29 after regulators gave it an all-clear in its “stress tests,” meaning a higher dividend and more stock buybacks.
Regulators approved 43 cents of dividends each quarter and $25.4 billion in stock buybacks. The dividend hike means the quarterly payout rises 4 cents per quarter, roughly 10%, while the buybacks could retire as many as 450 million shares, depending on how prices move.
Right now, they’re moving higher, as investors queue up for what looks like a forward yield of over 3%. The Wells yield is the highest among the big banks, by some distance, with JP Morgan Chase & Co. (NYSE:JPM) yielding just 2%. The Wells price-to-book ratio, at about 1.5%, is also close to that of JP Morgan.
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Healthy Bank?
The stress tests point to a healthy balance sheet and a healthy bank, after years of scandal. Berkshire Hathaway Inc. (NYSE:BRK.A), a big holder of Wells stock, looks like a winner.
But has Wells learned anything?
Some customers don’t think so. There are new lawsuits over hidden fees, and the investment division has been hit by a Securities and Exchange Commission fine for churning structured notes meant to be held to maturity.
Wells is still in cost-cutting mode, recently selling 52 branches with $2.3 billion in deposits, including 33 in Indiana alone, to Flagstar Bancorp Inc. (NYSE:FBC), a Michigan-based savings bank.
CEO Tim Sloan has warned of a “frothy” commercial real estate market, yet much of the problem is at his own bank, which has seen a sudden rise in delinquencies.
The bank’s ethics hotline is also getting more complains about “bad behavior” by bank managers, including the improper editing of business documents, including those meant to prevent money laundering.
Everybody Does It
The defense of Wells Fargo bulls is that “everybody” engages in some shady practices some time, and regulators have found fake accounts were opened at other banks.
But the negative headlines don’t help a bank that is fighting hard, at least on TV, to get its reputation back, with a big ad buy during the World Cup claiming it has been “re-established” with higher ethics. The dissonance between the ads and news stories is seen as jarring by some.
Buy or Sell Wells Fargo Stock?
While Wells Fargo was deemed a “big winner” in the annual stress tests, it also has the riskiest portfolio and its excess capital would fall 8.6% in an economic downturn, the biggest drop among the big banks.