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Wells Fargo plans to disclose its pay level when it reports second-quarter results in July.
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With the Federal Reserve stress tests in the rearview mirror, Wall Street has a little more guidance on the path of bank dividends later this year. But the uncertainty remains.
The Fed is limiting banks’ dividends with current payments for the third quarter and, in the future, additional dividends are limited to an average of the bank’s earnings in the past four quarters. Banks will have to resubmit their capital plans later this year, providing another cloud of risk for dividends if economic conditions deteriorate. But so far, most banks hope to keep their payments in the third quarter, with the notable exception of Wells Fargo (ticker: WFC).
The San Francisco-based bank acknowledged Monday that it expects its common stock dividend to drop below 51 cents a share, and said it plans to disclose its payout level when it reports second-quarter results in July. But that did not stop Wall Street analysts from guessing how many dividends will be cut, and most expect a cut of at least 25%.
“[B]According to our estimates, Wells Fargo needs to cut its dividend by more than 25% to feel comfortable that it will not exceed the Fed dividend limits in future quarters, “JP Morgan analyst Vivek Juneja wrote in a note Tuesday, a an assessment that was matched by analyst teams at Evercore ISI and Goldman Sachs, Juneja added that a 50% cut would be more appropriate.
This year’s stress testing round was unusual. In particular, the economic realities posed by the coronavirus pandemic appear to be much worse than the scenarios the Fed released in February. As such, the central bank had to adjust its test to account for a variety of recovery scenarios, ranging from a pullback to a normal V-shape to a double-dip W-shaped recession.
Still, despite the uncertainty, the Fed noted that the banks appear to be well capitalized and analysts said there were few surprises in the Fed’s assessment.
In addition to the dividend limit, banks are also prevented from repurchasing shares, even though many banks have already stopped repurchases and said they did not plan to resume them anytime soon.
“For now, we will have to deal with constant dividends and a wait-and-see approach to the resumption of the buyback until we all have a better idea of the direction of the economy, so banks are basically biotech stocks, but with fewer benefits, but also much lower multiples, “Glenn Shorr, an analyst at Evercore ISI, wrote in a note Tuesday.
Banks’ performance on Tuesday was mixed. The KBW bank index closed 2.1% as most banks reiterated their dividends, while the broader S&P 500 rose 1.5%. Wells Fargo shares fell 0.5%, while Goldman Sachs Group (GS) rose 2.1%. The stock was one of the leaders of the Dow Jones Industrial Average, which gained 0.9%.
Write to Carleton English at [email protected]
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