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Federal Reserve Gives Wells Fargo & Co (WFC) Approval to Hike Dividend: JPMorgan Chase & Co. (JPM), Bank of America Corp (BAC)

After the closing bell yesterday, the Federal Reserve released the results of its 2013 comprehensive capital analysis and review, or CCAR. Unlike last week’s stress tests, which were designed to ascertain whether the nation’s 18 largest banks could survive a severe economic downturn, the purpose of the CCAR is largely to determine which of the same banks should be allowed to increase the amount of capital that they return to shareholders via dividends or share buybacks.

Bank of America Corp (NYSE:BAC)

While there were notably few surprises, yesterday’s announcement wasn’t entirely void of them. The biggest shock, for example, was that the tried-and-true regional lender BB&T Corporation (NYSE:BBT) had its 2013 capital plan rejected by the Fed. To be fair, however, the reason for the rejection wasn’t entirely clear at first. As my colleague David Hanson discussed:

Although the Fed did not object to the Winston Salem, NC-based bank’s continuation of its increased dividend from the first quarter of 2013, the bank recently disclosed that it reevaluated its process related to calculating risk-weighted assets because of regulatory guidance. The change in methodology was not reflected in the Fed’s numbers, prompting the objection and necessary revision.

Fortunately, a similar surprise wasn’t in the cards for shareholders of the nation’s fourth largest bank by assets, Wells Fargo & Co (NYSE:WFC) . As it did during the stress tests, the California-based mortgage giant seemingly sailed through the CCAR process with little to no trouble. According to a press release issued soon after the results were made known, the bank confirmed that its 2013 capital plan includes a proposed dividend rate of $0.30 per share for the second quarter of 2013, and a proposed increase in common stock repurchase activity for 2013 compared with 2012. Both of which, of course, are contingent upon approval by the company’s board of directors. By means of comparison, JPMorgan Chase & Co. (NYSE:JPM) has proposed a 26.6% dividend increase, while Bank of America Corp (NYSE:BAC) is contenting itself with a $5 billion buyback — click here to read more about JPMorgan’s decision, and here for B of A’s.

Source: Company press release.

As you can see in the chart above, Wells Fargo & Co (NYSE:WFC) currently pays a $0.25 per share dividend each quarter — equating to an annual payout of $1. The increase, in turn, would raise the annual payout by 20% to $1.20 and translate into a 3.25% yield at yesterday’s closing price, making it one of the better-yielding banks in the market. In prepared remarks, CEO John Stumpf said that “We are extremely pleased to be able to reward our shareholders with increased distributions for 2013.” Suffice it to say, shareholders are probably equally pleased.

Beyond this, the performance of Wells Fargo’s capital base throughout both processes should give investors in California-based bank further reason to rest easy at night. At the end of the third quarter, the bank sported a Tier 1 common capital ratio of 9.9% — or nearly twice the requisite 5% minimum. After being subjected to the Fed’s “severely adverse” economic stress-test scenario, the rate fell to 7%. Although this amounted to a decline of 290 basis points, the hypothetical output was still 200 basis points above the benchmark figure. And once you remove the capital that Wells Fargo & Co (NYSE:WFC) intends to distribute this year, the rate settles at 5.9% — yet again above the necessary level.