Investors in bank stocks hate it when the Federal Reserve slashes interest rates, and have been wincing every time Fed Chair Jerome Powell steps to the microphone these days, holders of Wells Fargo (NYSE:WFC) stock included.
Sure, the Fed cut interest rates to near zero last week, and sure, that’s going to make it more challenging for bank stocks to thrive in the short term as the world deals with fallout from the coronavirus pandemic.
But if you love dividend stocks as much as I do, then there’s a few bright spots in the financial sector worth holding onto. And one of them is Wells Fargo and its juicy dividend.
Down, Along With the Usual Suspects
Wells Fargo stock is down big so far in 2020, off more than 46.7%. But that’s par for the course in the financial market these days — you’ll see that Bank of America (NYSE:BAC), Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) are all down too in near-perfect synchronization. The Invesco KBW Bank ETF (NASDAQ:KBWB) is down 42.4% this year.
WFC is expected to report Q2 earnings in mid-April, when analysts are expecting to see EPS of 79 cents, versus $1.12 per share for the same quarter a year ago.
In its Q4 2019 report, Wells Fargo reported earnings of 93 cents per share versus analysts’ expectations of $1.12. Revenue was $19.86 billion, versus forecast earnings of $20.14 billion.
Wells Fargo also recorded a $1.5 billion charge for legal fees in the quarter related to its retail sales scandal, when bank employees were accused a few years ago of secretly creating millions of unauthorized bank and credit card accounts to boost their sales figures.
No, that wasn’t a proud moment for Wells Fargo.
More telling in the Q4 numbers, Wells Fargo reported that its net interest margin fell from 2.66% to 2.53%, dropping 11% year-over-year as the Fed cut interest rates three times.
Net interest margin reflects the difference between what banks pay depositors and what they can charge customers for loans. The lower the interest rate, the less profit that banks can earn when they offer a mortgage or an auto loan.
Looking Ahead for WFC Stock
Wells Fargo is still trying to put the 2016 scandal in its past, but it’s not easy. It paid $3 billion in fines to the Justice Department earlier this year, and new CEO Charles Scharf, who took over WFC last year, appeared before Congress to again explain his company.
That testimony came amid a House of Representatives report that detailed Wells Fargo executives being slow to comply with regulators’ demands, and two board members resigned suddenly before they were also due to testify.
In fact, the hating on Wells Fargo seems to be one of the few things that Republicans and Democrats in Congress can agree on these days, as both sides of the aisle took their swings at Scharf. Rep. Maxine Waters (D-Calif.) called Wells Fargo a “lawless organization,” and Rep. Patrick McHenry (R-N.C.) blasted WFC for being “grossly mismanaged.”
Sharf, who was formerly CEO of Visa (NYSE:V) and Bank of New York Mellon (NYSE:BNY) said changes he wants to make to the company’s culture won’t be finished until 2021.
A meaningful change of culture will only help WFC stock. But the coronavirus pandemic will keep extraordinary pressure on the stock price for the near future.
According to Forbes, Wells Fargo’s portfolio is weighted toward real estate loans, including residential and commercial properties. As unemployment spikes and people continue to heed social distancing protocols, it will be challenging for people and small businesses to keep up with those mortgage payments.
Dividend is a Bright Spot
The one thing that makes WFC stock stand out from its peers is its generous dividend. It’s a 6.6% now because of the drop in share price, but even in early March before the market collapse, WFC offered a dividend better than 5%. That dwarfs anything offered by its big bank peers.
WFC offers an annual payout of $2.04 per share paid out a dividend for 146 consecutive quarters, going back more than three decades. And the dividend is growing, as WFC increased its payout for eight consecutive years.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.
