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

Despite the dividend cut, Wells Fargo was actually one of the best positioned banks going into the financial crisis. The Federal Reserve declared that Wells Fargo exceeded the capital levels required for well-capitalized banks in 2009, and its balance sheet remained healthy enough to let it acquire Wachovia at a bargain price.

The Federal Reserve has since required banks to maintain much more conservative balance sheets. If you don’t believe us about banks’ improved financial health, perhaps an excerpt from a 2013 interview of Warren Buffett will help:

“The banks will not get this country in trouble, I guarantee it. The capital ratios are huge, the excesses on the asset side have been largely cleared out. Our banking system is in the best shape in recent memory.”

Wells Fargo has a strong Dividend Safety Score of 86. Barring another financial crisis, which seems extremely unlikely, we think the company is well positioned to continue paying and growing its dividend.

Wells Fargo’s dividend has consumed 36% of its reported earnings over the past 12 months. As seen below, the company’s payout ratio has historically been between 30% and 50%. However, the company’s financial leverage caused earnings to plunge during the financial crisis, which sent its payout ratio to 160% and forced a dividend cut.

Source: Simply Safe Dividends

We can also see that the company’s reported earnings have been stable outside of the financial crisis, highlighting Wells Fargo’s large and diversified revenue base. Stable earnings make a dividend payment more reliable.

Source: Simply Safe Dividends

Not surprisingly, Wells Fargo also generates a consistent return on equity. However, as we mentioned earlier, we can see the business earns a meaningfully lower return on equity compared to the years leading up the financial crisis. Banks are much safer and better capitalized today due to increased regulations.

Source: Simply Safe Dividends

Turning to the balance sheet, the company maintains an “A” credit rating from Standard & Poor’s and appears to be financially healthy. Overall, we believe Wells Fargo’s dividend is very reliable. Banks are healthier than they have ever been, and Wells Fargo is particularly conservative in the way it runs its business.