There are huge red flags these days surrounding Wells Fargo (NYSE:WFC) and Wells Fargo stock. The beleaguered bank has been lagging behind its competitors in the big bank space, and now its dividend is in danger, too.
It’s true that a frothy dividend is the only reason to hold WFC stock. But there are many other reasons to avoid this company, even if it manages to leave that dividend yield intact.
All in all, there’s very little support for WFC these days.
Wells Fargo’s History Is Spotty
As I’ve made clear in the past, I’m not a big supporter of big banks. Based on my previous work in the Federal Reserve, I can’t trust their accounting.
Wells Fargo has a checkered history, at best. It’s been in trouble with financial regulators and Congress for years, dating back to the mortgage crisis that launched the Great Recession of 2008-09.
It’s still working to regain public trust after the 2016 scandal in which employees created hundreds of thousands of fake credit card accounts and 1.5 million fraudulent deposit accounts in their customers names. About 5,300 employees were fired for creating the accounts to reach sales goals.
The number of false accounts was eventually revealed to be 3.5 million and CEO John Stumpf was forced to resign.
In February, Wells Fargo agreed to a $3 billion settlement with the Justice Department to dispose of criminal charges and a civil action against the bank for customer abuses dating back to 2002.
In a statement, the prosecutor in the case, Nick Hanna, blistered WFC for its conduct.
This case illustrates a complete failure of leadership at multiple levels within the bank. Wells Fargo traded its hard-earned reputation for short-term profits and harmed untold numbers of customers along the way.
And that conduct has lasting consequences, including increased scrutiny and criticism from Congress to additional federal oversight. WFC continues to operate under growth restrictions imposed in 2018 by the Federal Reserve, saying they will only be lifted when the Fed believes that Wells Fargo has made significant changes.
As you can see, even in the best of economies, Wells Fargo has a lot of baggage. And this isn’t the best of economies.
Wells Fargo Stock at a Glance
Wells Fargo stock is down 41% year-to-date as it – as well as other big banks – are suffering through the economic downturn prompted by the novel coronavirus.
But because Wells Fargo already sits in a precarious position, it has been hurt even more than its major competitors. JPMorgan Chase (NYSE:JPM) shows a 23% YTD loss, and Bank of America (NYSE:BAC) is down 24%. Citigroup (NYSE:C) checks in with a 30% loss so far in 2020.
In mid-April, WFC issued a brutal first-quarter earnings report. While analysts had expected earnings per share of 33 cents, WFC gave us just a single penny per share in earnings. Revenue also missed badly, at $17.717 billion, versus analysts’ estimates of $19.284 billion.
CFO John Shrewsberry cited the need to build reserves for the poor earnings. WFC added $3.1 billion to its reserves for the quarter in preparation for how the Covid-19 pandemic could affect the bank in subsequent quarters.
While the worst of the pandemic may be behind us, the likelihood of low interest rates will prevent WFC and other big banks of generating healthy profit margins any time soon.
Japan and several European countries already have negative interest rates. The idea has also been pushed numerous times for the U.S. by President Donald Trump, who uses his Twitter (NYSE:TWTR) account to prod the Fed into doing his bidding.
And momentum is beginning to build. St. Louis Fed economist Yi Wen recently wrote that policymakers “will need to consider negative interest rates” to boost the U.S. economy.
That may be great for your mortgages, but it’s not going to help WFC stock.
The Dividend Is Ripe for Cutting
One place where WFC shines is its dividend. Currently at an inflated 7.4%, Wells Fargo pays 51 cents per quarter to shareholders, and has managed to increase its dividend for nine consecutive years.
But that outsized dividend appears too good to be true. JPMorgan analyst Vivek Juneja says some of Wells Fargo’s poor stock performance in 2020 can be attributed to investors bailing out because they believe WFC will cut the dividend.
Wells Fargo’s payout ratio is oversized compared to its big bank competitors. It’s an easy target as the company looks to conserve costs during an economic slump.
“We estimate Wells is our only bank that would need to immediately reduce common dividends if its capital fell into its buffers because of its high payout ratio,” he wrote in a note.
That’s bad news for WFC shareholders, but it shouldn’t be unexpected.
The Bottom Line for WFC Stock
Bank stocks aren’t great to hold this year, and Wells Fargo is the worst of the bunch considering its nearly 20-year track record of poor behavior. While a new management team is trying to right the ship, there’s no reason why WFC stock should be a drag on your portfolio.
WFC stock is a strong sell in my Portfolio Grader right now, where it has an “F” grade.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.