Wells Fargo & Co (WFC): Warren Buffett’s Biggest Holding Pays a High Quality Dividend

Finally, the biggest “risk” to banks is regulation that has actually made them less fundamentally risky. However, greater safety has come at the expense of lower returns on equity and higher compliance costs.

In response to the financial crisis, regulators implemented a number of major changes to the financial system. The Dodd-Frank Act is the most significant financial reform legislation since the 1930s and was enacted in July 2010.

These rules implemented new, more conservative requirements for big banks like Wells Fargo in regards to how much leverage and liquidity risk they can take and the mix of assets they can hold in order to promote financial stability.

As a result of these new capital requirements, many big banks have shrunk their operations, substantially reduced their leverage, and incurred higher costs to comply with new regulations to boost safety.

To provide an example, the chart below shows the percentage of “zero risk” assets on bank balance sheets over the last 10 years. The proportion has about doubled for global systematically important banks (GSIBs).

Source: Oliver Wyman

Some investors worry that banks have essentially become utility stocks due to the increased regulations to make them safer. With less financial leverage, a more conservative mix of assets, and more capital required to absorb greater losses without becoming distressed, banks will never return to the high returns they earned prior to the financial crisis.

While we acknowledge this “new normal,” we believe Wells Fargo is well positioned to earn some of the highest returns in the sector and appreciate the lower risks of banks in general.

Dividend Analysis: Wells Fargo

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Wells Fargo’s long-term dividend and fundamental data charts can all be seen by clicking here.

Dividend Safety Score

Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Dividend investors won’t forget Wells Fargo’s decision to cut its dividend by 85% in 2009 to save $5 billion per year, protect against further loan losses, and fund its 2008 acquisition of troubled Wachovia.