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What to Expect from Wells Fargo in 2H17 in the Wake of Scam

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Part 6
What to Expect from Wells Fargo in 2H17 in the Wake of Scam PART 6 OF 10

What’s behind Wells Fargo’s Expanding Payouts?

Shareholder payouts rise marginally

Wells Fargo’s (WFC) dividend payouts have risen from $0.375 per share per quarter in 2015 to $0.39, a 4% rise, which is relatively subdued growth when compared with its peers. Bankers (XLF) have passed recent stress tests. As a result, dividends are expected to rise for all major banks in the current year. Wells Fargo’s wealth division has performed well in rising markets, and its core banking margins have improved along with interest income partially offset by subdued credit offtake and trading revenues. The trend is expected to strengthen in 2H17 as Wells Fargo continues to see some outward traction of clients amid its recent controversy.

What&#8217;s behind Wells Fargo&#8217;s Expanding Payouts?

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Wells Fargo returned $3.4 billion to shareholders in 2Q17 with a net payout ratio of 63% as compared to $3.1 billion in the previous quarter with a payout ratio of 61%. The bank expects to enhance its 3Q17 dividends to $0.39 subject to board approval. Its 2Q17 dividend per share stood at $0.38, an implied annualized dividend yield of 3.1%. Wells Fargo’s competitors carry the following yields:

  • Bank of America (BAC): 2.1%
  • Citigroup (C): 1.9%
  • JPMorgan Chase (JPM): 2.2%

As commercial banks are expected to see reasonable growth in 2H17, dividends are expected to rise at a relatively slower pace with marginally high payout ratios.

Repurchases

Commercial bankers have engaged in higher repurchases to satisfy shareholder demands of higher payouts. Wells Fargo management has approved $11.5 billion in stock repurchases to be completed by June 30, 2018. This decision reflects the bank’s plan to buy stock when prices are expected to be lower. It repurchased common stock worth $1.5 billion in 2Q17. In 2H17, Wells Fargo is expected to engage in higher repurchases, subject to cash flow generation and stock prices.

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