Don't Bank on More Dividend Boosts - TheStreet

Don't Bank on More Dividend Boosts

Few banks are likely to follow Wells Fargo's suit amid the still-stressed credit and housing environment.
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Wells Fargo

(WFC) - Get Report

made a bold move in a shaky market by boosting its dividend by 10% Wednesday, but observers say few banks will follow suit amid a still-stressed housing and credit environment.

Wells Fargo shares surged more than 30% Wednesday, after the San Francisco-based bank declared a quarterly common stock dividend of 34 cents a share, up from 31 cents a share. Wells' second-quarter profit of $1.75 billion, or 53 cents a share, beat earnings estimates by 3 cents share, despite a 23% drop from a year ago.

The company's dividend increase and better-than-expected earnings boosted the wider financial sector Wednesday. The

NYSE

Financial Sector Index shot up 8.1% to close at 5,998.41.

By raising the dividend, Wells wanted to accomplish two things, says Cassandra Toroian, president and chief investment officer of Bell Rock Capital: to "restore confidence in their company/balance sheet" and provide an impetus for short-sellers to move along and target someone else.

"I doubt that we will see many more dividend increases, but you never know," Toroian adds in an email. She does not own shares of Wells Fargo.

Andrew Marquardt, a senior vice president and analyst at Fox-Pitt Kelton Cochran Caronia Waller, echoed Tororian's comments, believing that Wells Fargo is likely to be an exception this quarter.

"We believe

the results reflect ability to manage through

the tough environment, flight to quality status among customers, and balance sheet strength," he writes in a note. "In

an environment where capital is king, we believe

Wells Fargo stands out in terms of level and generation capacity."

As the earnings season begins, Wall Street is bracing for another difficult quarter from bank stocks. A dividend increase by any bank will be rare this earnings season, particularly as they look to shore up capital as loan losses mount. Other banks that have cut their dividend this year include

Citigroup

(C) - Get Report

,

Washington Mutual

(WM) - Get Report

,

National City

(NCC)

and

Huntington Bancshares

(HBAN) - Get Report

, among a host of others.

"This increase which reflects the company's performance and our confidence in its long-term growth, is possible because of our time-tested vision and values, diverse business model and our talented team," Wells Fargo CFO Howard Atkins said in a statement.

Another exception could be

U.S. Bancorp

(USB) - Get Report

. The company reported

growing revenue and a rosy outlook

Tuesday, even though profits slid vs. the year-ago quarter.

"Well, first off, that's a board decision, they have to make that decision, but based on the current performance of the company and based on the bias of myself, the management committee and the board, yes that is our intent," Chairman and CEO Richard Davis said during an earnings call, after one participant asked if the company intended to extend the company's record of 36 years of annual dividend increases.

"There are really three components: it is what you retain for yourself, it's what you put in stock buy backs and what you put in the dividend. I think with stock buy backs out of the picture for the rest of the year, that was code to tell you guys ... we will continue to have plenty of retained earnings and core capital generation, that's why we will continue to build the story around the logic of why we think we can be so assured that the dividend is safe," Davis said.

Wells Fargo has not been immune to the soured housing market and deteriorating home prices, particularly related to its home equity portfolio. Yet it has nonetheless remained relatively unscathed through the credit crisis. In the quarter, Wells Fargo took a $3 billion provision charge to cover against $1.5 billion of net charge-offs -- flat from the first quarter -- and an additional $1.5 billion reserve, primarily related to its struggling home equity portfolio, it said.

Still, some analysts remain cautious regarding Wells' dividend decision.

"By raising the dividend by 10%, Wells is clearly trying to convey its confidence in its capital position to the market, which is boosting the stock this morning," writes Keith Horowitz, an analyst at Citigroup, in a note on Wednesday. "While we agree its capital position is strong, we don't view this as prudent move in front of an increasingly difficult environment, plus we believe a better use for that capital is for

Wells Fargo to redeploy that capital in high return businesses that would help its long term outlook."