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Wells Fargo on Buyback Spree to Improve RoE in 2018

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Shareholder payouts

Higher interest margins have improved the return on equity (or RoE) for commercial banks (IYF) in 2017. However, subdued credit offtake and weaker trading activity can impact their operating performance in 2018. In order to counter that impact, banks are targeting repurchases in order to improve RoE for shareholders.

The banks have continued buybacks amid higher valuation for their stocks. The broad markets are expected to see weaker performance amid rising interest rates by the Federal Reserve.

Wells Fargo (WFC) rewards its shareholders with its dividend yields. The bank paid a dividend of $0.39 in 4Q17, up by $0.01 from 4Q16. The payout translated into a yield of 2.4%, which was higher than the following peers and their yields:

  • Bank of America (BAC): 1.5%
  • Citigroup (C): 1.7%
  • JPMorgan Chase (JPM): 1.9%

Wells Fargo paid $4.0 billion to shareholders in the form of dividends and repurchases in 4Q17, which was in line with 3Q17.

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Buybacks to continue in 2018

Wells Fargo (WFC) spent $2.0 billion on buybacks in 4Q17. For fiscal 2017, the bank spent $6.8 billion in net repurchases for 42.0% growth since 2016. It bought 51.4 million shares in 4Q17, up by 2.0 million shares from 3Q17. This growth was partially offset by the issuance of 15.1 million shares.

Wells Fargo’s net payout ratio stood at 69.7% in 4Q17. The bank posted a higher Tier 1 ratio of 11.9% in 4Q17, which would allow it to engage in more repurchases. It is targeting higher repurchases in 2018 backed by strengthening operating cash flows, an expected rebound in credit offtake, and higher net interest margins on rate hikes.

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