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Wells Fargo: A Surprisingly High-Yield Big Bank Stock

Wells Fargo: A Surprisingly High-Yield Big Bank Stock
(Alexey Novikov/Dreamstime)

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Friday, 26 April 2019 11:35 AM Current | Bio | Archive

The financial sector has recovered a great deal since the Great Recession nearly brought the entire financial system to the brink of collapse. Over the past decade, big banks have righted the ship by strengthening their balance sheets.

Wells Fargo (WFC) remains one of the strongest big bank stocks, with a high level of profitability and an attractive 3.7% dividend yield. After a strong performance in 2018, the future looks bright for Wells Fargo and its investors.

Overview of Recent Results

Wells Fargo recently reported first-quarter results. The company generated quarterly revenue of $21.6 billion, down 1.5% from the year-ago period. Wells Fargo managed to handily beat expectations, as revenue surpassed analyst forecasts by over $550 million. Wells Fargo’s adjusted earnings-per-share also exceeded expectations, and grew 25% from the same quarter last year.

Wells Fargo continues to benefit from the steady U.S. economy. In particular, a robust housing market continues to fuel Wells Fargo’s growth. Future growth will be dictated by U.S. GDP growth, as well as housing prices. In addition, the direction of interest rates will be a meaningful driver for Wells Fargo. In the most recent quarter, Wells Fargo’s net interest margin expanded to 2.91%, from 2.84% in the 2017 first quarter.

After increasing over the past year, interest rate hikes have been put on hold in 2019. The Federal Reserve has taken a more cautious approach to monetary tightening, which could pose a risk for big banks like Wells Fargo. Banks benefit from rising interest rates because they can earn more profit on loans issued, while the rate of interest paid on deposits tends to rise more modestly.

As a result, a flattening yield curve is a potential challenge for Wells Fargo. Indeed, Wells Fargo’s net interest income came in flat last quarter.

Take Wells Fargo’s Dividend to the Bank

Perhaps the best aspect of a potential investment in Wells Fargo, is its dividend. While many of the big U.S. banks have dividend yields of 2% to 3%, Wells Fargo stock offers a 3.7% dividend yield. This is an especially attractive yield, considering the average dividend yield of the broader S&P 500 Index is just 1.9%.

And, Wells Fargo has plenty of room for dividend growth. The company continues to grow EPS at a strong rate, as evidenced by the 25% growth rate in the first quarter. And, with a projected dividend payout ratio below 40% for 2019, there is plenty of room for Wells Fargo to continue increasing its dividend each year. On January 22nd, Wells Fargo increased its dividend by 4.7%.

Wells Fargo also returns a great deal of cash to shareholders through share buybacks. In total, Wells Fargo returned $6.0 billion to shareholders in the most recent quarter through common stock dividends and net share repurchases, up 49% from the first quarter of 2018.

Final Thoughts

The steady recovery of the big U.S. banks over the past 10 years has allowed them to return lots of cash to shareholders.

Wells Fargo has a long runway of future growth up ahead, thanks to its increasing loans and deposits, tax reform, and share buybacks. In addition, the stock offers a hefty 3.7% dividend yield, along with the ability to raise dividends each year moving forward.

These qualities make Wells Fargo a highly attractive big bank stock for dividend growth investors.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Wells Fargo (WFC) remains one of the strongest big bank stocks, with a high level of profitability and an attractive 3.7% dividend yield. After a strong performance in 2018, the future looks bright for Wells Fargo and its investors.
wells fargo, high, yield, big, bank, stock
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2019-35-26
Friday, 26 April 2019 11:35 AM
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