Wells Fargo & Co (NYSE: WFC) has had a tough couple of years dealing with scandals, lawsuits and regulatory penalties. However, the big U.S. bank took an aggressive approach to its 2018 capital return plan, and the gamble paid off on Thursday when the Federal Reserve gave Wells Fargo the green light.
Wells Fargo was approved to pay out $8.5 billion in dividends over the next four quarters, or 43 cents per share on a quarterly basis. WFC stock is currently paying a 39-cent quarterly dividend. The new payout will put Wells Fargo’s dividend yield at around 3.2 percent, well above the S&P 500 index average yield of 1.8 percent.
[See: 7 of the Best Stocks to Buy for 2018.]
In addition, Wells Fargo was approved for $24.5 billion in share buybacks, more than double the $11.5 billion in buybacks that the Fed approved last year.
Bank of America analyst Erika Najarian says Wells Fargo is the big winner of this year’s Comprehensive Capital Analysis and Review stress test, and the new capital plan makes the stock an attractive long-term investment. In addition to the buybacks supporting the share price and helping boost earnings per share growth, Najarian says the Fed approving such an aggressive plan suggests Wells Fargo may have earned back some trust from regulators.
“We think the Fed’s non-objection is a good sign that WFC is repairing its regulatory issues, which could prove beneficial to its multiple,” Najarian says.
According to Bank of America, stocks of banks which have had larger-than-expected capital return plans approved by the Fed have historically outperformed banking peers by an average of 1.1 percent over the three months following the CCAR results.
[See: 7 of the Best Bank Stocks to Buy for 2018.]
“Further, WFC has 9 percent of market cap in excess capital, and untrapping this is crucial for the bank to achieve the higher end of its ROTCE (return on tangible common equity) target of 14 to 17 percent,” Najarian says.
She says the CCAR results were a positive step in a three-pronged long-term bull thesis for Wells Fargo. First, Wells Fargo needs to convince investors that there is no longer regulatory risk associated with the stock. Second, Wells Fargo needs to deploy as much of its excess capital as possible. Third, Najarian says the company needs to trim its expenses, which it can demonstrate in its upcoming second-quarter earnings report.
Bank of America has a “buy” rating and $68 price target for WFC stock.
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Wells Fargo & Co (WFC) Stock Is Biggest Stress Test Winner originally appeared on usnews.com
