Wells Fargo Slashes Dividend to 5 Cents

Updated from 8:10 a.m. EST

In a widely expected move, Wells Fargo ( WFC) 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) 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), from 66 cents to 10 cents, and US Bancorp ( USB), 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). It contributed to a wide selloff that sent Citigroup ( C) 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.

" Peer 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). 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) and Morgan Stanley ( MS) -- 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."

Stumpf noted before Congress last month that Wells didn't ask for any TARP money, but accepted the funds at the behest of regulators to remove any stigma from peers that required them. The Treasury Department lent Wells $25 billion in exchange for preferred securities that come with their own dividend payment of around 5%.

On Friday, Stumpf characterized those payments as a "significant cost." Lessening the common stock dividend not only strengthened Wells' balance sheet, he said, but was "the right thing to do" to repay the TARP investment at "the earliest practical date."

But there is also mass uncertainty about how badly accelerating job losses, deteriorating wealth, and a still-struggling housing market will hurt banks. If loan defaults that started with subprime continue to spread up through the economic spectrum, as some economists and observers predict, banks may be feeling new pain for years to come. The jobs report on Friday showed job losses accelerating, with the unemployment rate climbing to 8.1% in February -- a level not seen since 1983.

Atkins characterized Wells' results in the first two months of 2009 as "strong," citing growth in lending, deposits, and mortgage originations. He also noted that the bank's capital position was ahead of its peers, with tier-1 capital, a measure of equity and cash reserves, at 7.84%, above the 6% threshold that regulators have set for "well-capitalized" banks.

Additionally, Wells holds $36 billion in tangible common equity, representing 2.86% of tangible assets and 3.32% of regulatory risk-weighted assets. The TCE measure has gained significant attention recently, since it places more weight on hard assets and liabilities, stripping out assets that are more difficult to value like intangible items and goodwill. This is important to investors, because TCE is seen as a measure of core business strength, and provides a yardstick for what a company would receive if it were forced to liquidate.

Holding onto the $5 billion in dividend payments allowed Wells to boost TCE by 40 basis points.

Atkins also took pains to assure investors that risks associated with Wells' acquisition of Wachovia -- and its troubled Golden West loan portfolio -- have been "significantly reduced." Rather than write down those assets over time or wait for the market to recover, Wells posted $37.2 billion in credit writedowns related to Wachovia last quarter, charged off $1.2 billion in its risky mortgages, and took $9.6 billion in losses on its securities portfolio.

The CFO said the Wachovia deal is "on track" to save $5 billion in annual expenses, and that he expects integration costs to come in lower than initial projections. Other management initiatives will save Wells another $2 billion, starting in the second quarter. Job cuts are likely part of that cost-saving plan, with Stumpf telling the Charlotte Observer that "there will be duplicative jobs and there will be job loss," though he did not provide an estimate or a time frame.

Whether any of this makes Wells a "buy" is unclear. Of the 21 stock analysts covering Wells, most rate it a "buy" or a "hold," with only four recommending investors sell the stock, according to Thomson Reuters. The firm's shares have performed better than its competitors and Wells remained profitable in 2008, despite huge turmoil in the economy and financial markets.

Stumpf also noted that Wells has "among the most loyal shareholders in America -- individuals and institutions alike." Among those investors are Warren Buffett's Berkshire Hathaway ( BRK-A), which bought another 14.2 million shares of Wells during the fourth quarter. At Dec. 31, Berkshire held 304.4 million shares of Wells, representing 7.2% of the firm. (It also holds 75.1 million shares of US Bancorp, or 4.3% of that bank.)

Don Wordell, portfolio manager of the RidgeWorth Mid-Cap Value Equity Fund, factors in dividends, valuation and fundamentals when selecting stocks. He doesn't hold Wells Fargo -- its size and scope is outside of his mid-cap portfolio -- but says he became more bullish on PNC after that company announced its dividend slash earlier this week, noting that it sets the stage for its TCE ratio to gain 35 to 40 basis points.

"I'm much more interested in PNC than I was six months ago, because they cut their dividend," says Wordell, whose strategy. "I want to own a company that's in a position to grow at the bottom of this cycle."

Joseph Woelfel contributed to this report.

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