USB US Bancorp

Wells Fargo & Company (WFC) has passed the stress test of the Federal Reserve with flying colors. The company is also enhancing its shareholder wealth by almost doubling its dividend.

Wells Fargo’s capital plan including dividend increase and other capital actions were submitted to the Fed in January this year. The Fed did not object to its capital plan and therefore, the company could increase its quarterly dividend by 10 cents.

Earlier in January, the company announced a dividend of 12 cents for the first quarter. With this 10 cent increase, the dividend now stands at 22 cents for the first quarter. It is payable on March 30, 2012, to stockholders of record on March 26, 2012.

Moreover, the capital plan of Wells Fargo that passed the Fed’s stress test also includes an increase in share repurchase activity in 2012 compared with the prior year. It also incorporates selective redemptions of trust preferred securities that no longer count as Tier 1 Capital under the Dodd-Frank Act.

Notably, this represents the second consecutive year of dividend increase for Wells Fargo. Last year in March, following the stress test results, the company had enhanced its dividend to 12 cents from 5 cents paid earlier. Besides Wells Fargo, JPMorgan Chase & Co. (JPM) and U.S. Bancorp (USB) also cleared the stress test requirements and therefore increased their capital redeploying efforts through dividend increases and share buybacks.

However, Citigroup Inc. (C) and three other banks have failed to prove their capital strength, and their plans to return capital to shareholders have faced objections from the Fed.

In total, 15 of the 19 largest banks in U.S. passed the stress test. In fact, these companies had to justify that their capital plans were adequate to help them maintain sufficient financial strength and continue business even in adverse economic scenarios. Passing of such a large number of banks in the stress test inspires our confidence on the banking sector and we believe that the sector is progressing well.

For Wells Fargo, its business model is an impressive one that allows it to generate sufficient capital, grow its balance sheet and help return capital to shareholders. Moreover, we believe that strategic acquisitions will expand Wells Fargo’s business and improve its profitability over time.

The company’s diversified revenue stream, strong capital position and expanded business through the Wachovia acquisition along with its integration, expected expense management as well as improved credit quality will also support its profit figures. Yet, a sluggish economic recovery in addition to regulatory issues might limit its growth to some extent.

Wells Fargo currently retains its Zacks #3 Rank, which translates into a short-term Hold rating.

 
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