“Wells Fargo joining the ranks of Citigroup, GE, a list of financial companies which recently announced dividend cuts, and investors are having a positive reaction with shares up 9% in pre-market trading after Wells Fargo slashed its dividend by 85%. Cutting it from 34 cents a share, to 5 cents a share, that will save the company about $5 billion dollars, the company also saying that business is good…”
These were the comments on Fox Business this morning on Wells Fargo (WFC). One day after there were rumors that Moody’s (MCO) was considering a possible downgrade of Wells Fargo’s credit rating, the company has elected to strip down its dividend. Moody’s warned that banks are expected to see rising credit costs and deteriorating returns. There is now doubt this has been a week to forget for Wells Fargo shareholders. The stock is down more than 25% on the week, mostly because of those rumors surrounding the credit rating. Now, the stock is getting a pop, which shareholders appreciate but it is at the expense of their dividend income.
Management is making statements that business is good and that the merger with Wachovia is costing less than expected. And the company used the ever popular yet vague statement that their capital position is “near the top of their peer group.” Selected comments from the Wells Fargo announcement are below:
“Operating results for the first two months of the year are strong. Our ability to grow market share in this environment and to benefit from new business opportunities remains second to none. Our merger with Wachovia is on track and we remain as optimistic as ever about its potential benefits for all our stakeholders…The Wachovia merger is proceeding as planned and is on track. We’re on track to achieve $5 billion in annual merger-related expense savings which will be fully realized upon completion of the integration and we have already begun to realize these savings. We also expect that total merger integration costs will be lower than originally projected because certain costs”
One question: If the results of the first two months of operations are this strong, then why cut the dividend? Why now? Dividends are entirely a decision of management, and while it may be prudent to as much capital as possible in these times, it does seem like they are saying one thing and yet doing another. This market definitely warrants a healthy dose of skepticism.