The board of Wells Fargo & Company (NYSE:WFC) has announced that it will be increasing its dividend by 100% on the 1st of September to US$0.20. Even though the dividend went up, the yield is still quite low at only 1.1%.
Wells Fargo's Payment Has Solid Earnings Coverage
It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Wells Fargo is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Over the next year, EPS is forecast to expand by 4.4%. Assuming the dividend continues along recent trends, we think the payout ratio could be 13% by next year, which is in a pretty sustainable range.
The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2011, the dividend has gone from US$0.20 to US$0.40. This means that it has been growing its distributions at 7.2% per annum over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.
Wells Fargo May Find It Hard To Grow The Dividend
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Although it's important to note that Wells Fargo's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time.
The Dividend Could Prove To Be Unreliable
Overall, we always like to see the dividend being raised, but we don't think Wells Fargo will make a great income stock. While Wells Fargo is earning enough to cover the payments, the cash flows are lacking. We don't think Wells Fargo is a great stock to add to your portfolio if income is your focus.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Wells Fargo that investors need to be conscious of moving forward. We have also put together a list of global stocks with a solid dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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