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Why Wells Fargo & Co (WFC) Will Increase Its Dividend: Citigroup Inc. (C), Bank of America Corp (BAC)

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This Thursday is arguably the biggest day of the year for bank investors. It’s the day they learn which banks received regulatory approval to increase quarterly dividend payouts.

While this may seem like a no-brainer considering the bumper year most banks had in 2012, over the past two years, we’ve seen that nothing could be further from the truth. In 2011, the Federal Reserve sent Bank of America Corp (NYSE:BAC) scurrying off with its tail between its legs after having its request denied. And Citigroup Inc. (NYSE:C)‘s analogous experience in 2012 contributed to the ousting of its now-former CEO Vikram Pandit.

Wells Fargo & Co (NYSE:WFC)

There are nevertheless a handful of lenders that stand a better chance than others of gaining the requisite approval. And Wells Fargo & Co (NYSE:WFC) falls squarely into this category.

Will the Fed approve Wells Fargo & Co (NYSE:WFC)’s dividend request?
If you haven’t been following Wells Fargo as closely as, say, a bank analyst has been over the past few months, this may seem like a presumptuous question, because it presupposes that Wells Fargo has asked for approval in the first place. Rest assured, however: There’s little question that it’s done so.

Speaking at a conference in December, Wells Fargo & Co (NYSE:WFC)’s CEO John Stumpf said specifically that the nation’s largest home lender will ask regulators for permission to return more capital to shareholders.

While this could theoretically be limited to share buybacks, that interpretation seems unlikely. Prior to the financial crisis, Wells Fargo paid out anywhere between 35% and 50% of its earnings to shareholders via dividends. Since then, its payout ratio dropped dramatically and has only recently made its way back to the mid to high 20% range. Coupled with Stumpf’s statement, in turn, it seems safe to assume that Wells Fargo is looking to move its payout ratio back to its historical norm.

This leaves the question of whether the Fed will approve the bank’s presupposed request. And I believe the answer to this is also “yes.”

According to the central bank, petitioners seeking to return capital to shareholders must demonstrate the “ability to maintain capital above each minimum regulatory capital ratio and above a tier 1 common ratio of 5 percent on a pro forma basis under expected and stressful conditions throughout the planning horizon.”

The ability of the nation’s largest banks to do so was just tested as a part of the 2013 Dodd-Frank stress tests, the results of which were released last Thursday — click here to learn everything you need to know about how each of the nation’s largest banks performed. And if you’re a shareholder in Wells Fargo & Co (NYSE:WFC), then you’ll be happy to hear that it made its way through the Fed’s hypothetical economic gauntlet with ease.

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