Wells Fargo Slashes Dividend to 5 Cents

Updated from 8:10 a.m. EST

In a widely expected move, Wells Fargo (WFC Quote) became the last of the major banks to slash its dividend on Friday, calling the decision "very difficult" but necessary.

Wells cut its dividend to 5 cents a share from 34 cents, enabling the bank to retain an additional $5 billion in common equity in 2009. The nickel-per-quarter payout represents a 0.6% yield as of Thursday's closing share price, down from a 4.2% yield.

"This was a very difficult decision but it's absolutely right for our company and our shareholders because it will further strengthen our ability to grow market share and to continue our long track record of profitable growth," President and CEO John Stumpf said in a statement. "We will return to a more normalized dividend level as soon as practical."

Investors were awaiting the announcement from Wells, the last major bank to put capital preservation ahead of dividend payouts. BofA first reported a hearty dividend cut in January, from 32 cents to 1 cent. Then came JPMorgan Chase (JPM Quote) last month, from 38 cents to 5 cents, as Citi halted its dividend on common and preferred shares altogether. This week brought announcements from PNC Financial Group (PNC Quote), from 66 cents to 10 cents, and US Bancorp (USB Quote), from 42.5 cents to a nickel.

While shares of the San Francisco-based bank surged over 10% at $8.93 in morning trading following the announcement on a mixture of relief and short covering, by the afternoon they had given up most of those gains. Recently, the stock was trading up 2.6%, at $8.33.

Wells shares had shed as much as 20% in Thursday's session and closed down $1.54, or 16%, at $8.12. The drop was fueled by Moody's Investors Service's warning it could downgrade Wells and Bank of America (BAC Quote). It contributed to a wide selloff that sent Citigroup (C Quote) stock under $1, as investors worried about the health of the banking system.

Sandler O'Neill Partners analyst R. Scott Siefers, who rates Wells a "hold," points out that Wells may not be out of the woods yet. Competitors' shares have all slumped further downward since their dividend-cut announcements.

"[P]eer stock price behavior suggests that WFC could have some trouble sustaining these gains," Siefers writes.

Barclays Capital Managing Director Jason Goldberg points out that there is one remaining high-profile bank that hasn't slashed its dividend - BB&T (BBT Quote). That firm actually announced a hike to its second-quarter payout on Feb. 24, by a penny to 47 cents.

"The group has been under massive pressure for months and months, and in a sense these dividend cuts are kind of a relief," says Roger Young, a portfolio manager at Miller/Howard Investments who focuses on dividend stocks. "We knew it was going to happen, and now the cards are on the table."

Still, the news is bittersweet for shareholders, who became accustomed to fulsome dividends during the boom time, when banks were reaping huge profits. For instance, in the decade leading up to 2007, Bank of America's dividend nearly quadrupled, from 17 cents to 64 cents.

But every dollar has become precious in these capital-constrained times, especially for banks that are trying to climb back to consistent profitability by lending them. Wells CFO Howard Atkins says that the ability to invest that $5 billion to make more money and gain market share "is more important than ever."

Furthermore, the top eight banks that received government loans -- which also include Goldman Sachs (GS Quote) and Morgan Stanley (MS Quote) -- might be better off repaying the $174.2 billion they have received with the capital instead of distributing it to shareholders. As soon as those loans are repaid, banks can get out from under the auspices of Uncle Sam and become more competitive.

"[Dividend cuts] set the stage for a more profitable future and allows them to get out from under TARP sooner," says Young, who does not own Wells. But, he adds, "when that soon is, only you and I can guess."