Two major elements are important when considering investing in a stock for dividend purposes: evidence of a company's commitment to return value to investors in the form of dividends, and the company's ability to follow through on that commitment – in other words, the overall financial soundness of the company and its reasonable future growth prospects. Wells Fargo & Company (NYSE: WFC) qualifies on both counts. It has demonstrated its commitment to healthy dividend payouts for shareholders. Among the big four U.S. money center banks, Wells Fargo is one of the most financially solid in the aftermath of the 2008 financial crisis.
Wells Fargo is the world's largest bank measured by market capitalization, with a market cap of $275 billion. In 2014, for the second year in a row, Wells Fargo was ranked as the top banking brand name in the world in Brand Finance's study of 500 banks. The bank operates more than 75 different business lines through a number of subsidiaries, such as Wells Fargo Advisors and Pamlico Capital. Wells Fargo provides a full range of financial services and has offices worldwide, with major international hub offices in London and Hong Kong. The bank boosted its standing as a major multinational financial services company through its 1998 merger with Norwest Financial and its 2008 acquisition of Wachovia Bank. This acquisition was a major victory over competitor Citigroup, Inc., Wells Fargo's rival in a hotly contested fight to acquire Wachovia.
In addition to being the world's largest bank by market capitalization, Wells Fargo is, as of 2013, the largest mortgage originator and consumer lender in the United States, and it is the second-largest bank by deposits and credit cards issued. It is also in the top five banks worldwide in the area of private banking and wealth management, and it operates one of the largest retail brokerages in the U.S.
As the largest mortgage originator and consumer lender, Wells Fargo is well-positioned to increase revenues and profitability substantially once interest rates begin to rise. In addition, the company is committed to expanding its investment banking operations, where revenues grew by 44% in 2010.
Of the major U.S. banks, Wells Fargo is the most diversified in terms of sources of revenue. Its total loan portfolio is composed of approximately a 50/50 split of commercial and consumer loans, along with a moderate 5% of its portfolio in foreign loans. Half of the bank's revenues are derived from non-interest income, and the other half are derived from net interest income. Its non-interest income is also very diversified, with approximately one-third derived from mortgage fees, another third from financial advising and management fees, approximately 20% from service and card fees, nearly another 20% from various other fees, and 10% from insurance and trading profits.
A significant endorsement of Wells Fargo as a good investment going forward is the fact that Wells Fargo is now the top holding in Berkshire Hathaway.
All of the big four U.S. banks slashed their dividend payments during the 2008-2009 financial crisis, but of the four, Wells Fargo has been the quickest to recover. As of 2015, its dividend of 37 cents a share is above the 34-cent high that it had reached just prior to the financial crisis. Wells Fargo's 79% annualized dividend growth rate between 2012 and 2015 outpaces that of all its competitors, except for JPMorgan Chase & Co. At 2.91%, Wells Fargo offers the largest dividend yield of any of the major money center banks in the U.S.
In analyzing a company's ability to return profits to shareholders in the form of dividends, it's important to look at net income in relation to revenues. By that standard, Wells Fargo has performed well. While its total revenues were virtually identical in 2011 and 2013, the company managed to increase its net income profitability by one-third, from approximately $16 billion to $22 billion. Increasing net income and profit margins are a key determinant in a company's ability to increase its dividend payout to investors, and the performance of Wells Fargo indicates a well-managed company.
Since the 2008 financial crisis, Wells Fargo has consistently outperformed its peers on a number of key financial metrics, including return on equity (ROE) and return on assets (ROA). The company has managed a higher deposit/liability ratio than its major competitors, a lower delinquency and foreclosure rate, and a lower percentage of net charge-offs. Part of Wells Fargo's strength in a low interest rate environment comes from the fact that it derives nearly half its revenues from non-interest income.
The company's debt/equity (D/E) ratio of just 1.06 shows that it is not overleveraged to the point where a temporary downturn in revenue would cause significant problems. Wells Fargo's D/E ratio of 1.06 looks quite conservative in leveraged financing, compared to JPMorgan's D/E ratio of 1.46.
Wells Fargo has solidified its customer base by doing the best job of cross selling, signing up existing customers for additional services. This is especially important in the banking industry. The more services a customer is regularly using at a bank, the more reluctant he is to switch banks, since it involves moving multiple accounts. Wells Fargo has made cross selling a point of emphasis, and its success is evident in its high revenue-to-asset ratio.
The company's dividend payout ratio of approximately 28% leaves it with more than 70% of earnings to reinvest in growth. Based on past performance, that should be sufficient for Wells Fargo to continue to have the highest annualized growth rate among the big four banks. With a payout ratio set at a very reasonable level, the company should be able to maintain its dividend, even if that growth is somewhat sporadic.
The company's median dividend growth rate since 2000 has been 13.5% per year, nearly double the industry median of just 7.4%. This figure shows Wells Fargo's commitment to increasing its dividend payouts to shareholders.
Based on Wells Fargo's current financial health, advantageous market position versus its major competitors, and its past and present dividend yield and performance, it may be the most promising dividend stock among the big four U.S. banks. It is a solid performer as a dividend stock, and current fundamental analysis of the company indicates that it is likely to be able to continue to increase its dividend payout steadily.