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WFC Stress Test Results


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Wells Fargo & Company Increases Quarterly Cash Dividend Rate to $0.22

Tuesday, March 13, 2012 04:45:00 PM

 

 

Wells Fargo & Company (NYSE: WFC) today announced an additional first quarter 2012 dividend on its common stock of $0.10 per share, which together with the $0.12 per share dividend previously declared on January 24, 2012, brings the total dividend declared for the first quarter to $0.22 per share. The additional dividend is payable March 30, 2012, to stockholders of record on March 26, 2012.

 

The Company also announced that the Federal Reserve did not object to its Capital Plan submitted in January 2012, or to the dividend rate increase and other capital actions included in the plan.

 

“We are extremely pleased to reward our shareholders with an increased dividend rate for a second consecutive year,” said Chairman and CEO John Stumpf. “Today’s decision by the Federal Reserve Board allows us to increase the dividend and undertake other actions to return capital to our shareholders. Our ability to do this is a testament to our diversified business model, which has allowed us to continue to grow capital, while at the same time growing our balance sheet and providing our shareholders with more return on their investment.

 

“The Federal Reserve's stress test scenario applied a series of very conservative assumptions to validate the industry’s ability to perform and maintain adequate capital in the event of unlikely, dire circumstances. Wells Fargo has always managed its business to perform for shareholders through a variety of economic environments and we are pleased that this process again validates the strength of our franchise.”

 

In addition to the increased dividend rate, the Company’s capital plan allows for a higher level of common share repurchase activity in 2012 versus 2011. The plan also includes selective redemptions of trust preferred securities that no longer count as Tier 1 Capital under the Dodd-Frank Act.

 

 

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0.22$ is of no help to the warrants. sucks.

 

It's not massive, but any increase to the dividend will bring your exercise price down.  You have 6 years left to exercise.  Cheers!

 

Actually, I think the WFC quarterly dividend has to be at least $0.34 per share in order for the WFC warrant strike to be adjusted.  It's different than the BAC warrants.

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The dividend has to hit 0.34/q before the strike adjusts.  It will be at least two years before that.

 

My warrants are now trading positive from my purchase price.  I can live with itw the awesome resukts for now.  If WFc goes above 34.01 in the near future (tomorrow maybe) then these warrants will be in the money. 

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The dividend has to hit 0.34/q before the strike adjusts.  It will be at least two years before that.

 

My warrants are now trading positive from my purchase price.  I can live with itw the awesome resukts for now.  If WFc goes above 34.01 in the near future (tomorrow maybe) then these warrants will be in the money. 

 

I'm sure glad I bought Wells equity and a ton of BAC A warrants instead then!  I read the prospectus for the BAC warrants, and just assumed it was the same for the WFC ones too.  Cheers!

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A 34 cent dividend would have been huge for the warrants. It would have taken the strike down by 1.36$ this year, this would justify a 10% rise in the warrant IMO.

 

Instead we get lost equity of 0.88 a year.

 

At least we get some buybacks.

 

Anyways, The equity and the warrant are still changing by the same percentages, While it should move about double in my opinion, so despite all this, the warrant is still looking pretty good.

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A 34 cent dividend would have been huge for the warrants. It would have taken the strike down by 1.36$ this year, this would justify a 10% rise in the warrant IMO.

 

Instead we get lost equity of 0.88 a year.

 

At least we get some buybacks.

 

Arden,

 

I'm pretty sure (like, positive) that the strike price only comes down to the extent that there is a dividend in excess of 34 cents in a given quarter. 

 

So, if (when) Wells pays, say, a 35 cent dividend in a quarter, the warrant strike will come down by a penny.

 

 

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The 2 statement are unrelated- I know that the adjustment is only above 34 cents, but how do you figure the strike price will come down by a penny?

 

are you saying the adjustment is done in the same proportion as (dividend)/(market price of common)? is that true for buybacks as well? because if some, we should expect the strike price to rise.

 

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the strike comes down by the EXCESS  of the dividend above $.34.

 

Dammnnn :P I totally misunderstood that. If so, then I should have prayed that the dividend will be as low as possible, because if they are above the threshold of 0.34, I'm losing 1.32$ of equity every year, and it's better for me that they just don't pay out.

 

BTW, Eric and pals, Do the buybacks at least reach the warrant holders intact?

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the strike comes down by the EXCESS  of the dividend above $.34.

 

Dammnnn :P I totally misunderstood that. If so, then I should have prayed that the dividend will be as low as possible, because if they are above the threshold of 0.34, I'm losing 1.32$ of equity every year, and it's better for me that they just don't pay out.

 

BTW, Eric and pals, Do the buybacks at least reach the warrant holders intact?

 

Uh. I do not understand this argument. In this specific situation, the fact that they pay higher dividend (an increase over 80%) says something about the company and makes it far more attractive to certain investors. This means an increase in the common price, followed by the warrant price going up. You should be happy. In addition, assuming they will continuously increase the dividend, as it gets closer to 0.34 it raises the attractiveness of the warrant. And then there's the buybacks...

 

To add a silly argument of myself, it's enough for the common to remain about where it is now for the warrant to increase by at least 10% in the very near future, perhaps even a few days.

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You really think someone will buy WFC for a Dollar more in 2018, because it paid a dividend back in 2012? You think they will do that even though that WFC has a dollar less in equity?

That's nonsense and completely psychological and technical. I want WFC in 2018 to have as much equity as possible, as long as they can get a decent return.

 

The correct price of the warrant now depends on whether WFC will reach about 55 by 2018, since you have to compensate for the alternative yield of the common. I think it's possible, but much more so with less dividends and more buybacks.

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I'm sure glad I bought Wells equity and a ton of BAC A warrants instead then!  I read the prospectus for the BAC warrants, and just assumed it was the same for the WFC ones too.  Cheers!

 

Are you saying that the WFC common equity is further ahead than the warrant simply from the fact that they don't have full dividend protection as per BAC warrant terms?  Based on today's price of each? 

 

At 1x book value upon maturity of the warrant that might be the case - but otherwise I don't see this at all.  I have most of my WFC in the common equity also -- but am considering exchanging more for the warrant variety - to me they are getting close to being a screaming buy in comparison.

 

Take a 'supposed' worst case scenario where WFC pays out $0.22/share for the next 4 payouts, then increases this to $0.34/share (without any further increases) for the next 22 until maturity of the warrants (maximum unprotected dividend scenario).  Assume WFC's average return on equity is 15%.  In favour of the common equity -- I have also added a reasonably generous cumulative return of 15% annually to the base dividends.  Without taking into account valuation at maturity, cumulative roe (etc) the results might be a little surprising. 

 

at 2x book warrant holders would be almost twice better off

 

50.41 BV at Maturity

 

2.0 BV multiple at maturity

 

100.82 Stock price

34.01 Strike

66.81 10.40 6.4 x  <<< Warrant Price and multiple Return

 

100.82

8.36

109.18 33.30 3.3 x Stock Price and multiple Return

(Dividends with no cumulative return)

100.82

13.25

114.07 33.30 3.4 x  <<< Stock Price and multiple Return

(Dividends + cumulative annual return of 15%)

 

at a valuation of 1.07x bv it starts to favour the common equity

 

50.41 BV at Maturity

 

1.07 BV multiple at maturity

 

53.94 Stock price

34.01 Strike

19.93 10.40 1.9 x <<< Warrant Price and multiple Return

 

53.94

8.36

62.30 33.30 1.9 x Stock Price and multiple Return

(Dividends with no cumulative return)

53.94

13.25

67.19 33.30 2.0 x <<< Stock Price and multiple Return

(Dividends + cumulative annual return of 15%)

 

Stretch the multiple to 3x bv

- Common equity holders return improves 44% vs a 2x book multiple (4.9/3.4)

- whereas warrant holders return improves 76% vs a 2x book multiple (11.3/6.4)

 

50.41 BV at Maturity

 

3.0 BV multiple at maturity

 

151.23 Stock price

34.01 Strike

117.22 10.40 11.3 x <<< Warrant Price and multiple Return

 

151.23

8.36

159.59 33.30 4.8 x Stock Price and multiple Return

(Dividends with no cumulative return)

151.23

13.25

164.48 33.30 4.9 x  <<< Stock Price and multiple Return

(Dividends + cumulative annual return of 15%)

 

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I'm very hard-pressed to believe WFC will ever be valued at 3 times book, and I prefer the conservative view that it would be valued somewhere between 1-1.5 times book.  If the book value multiple stretches, then you are better off with the warrants, but I don't think the advantage is large enough conservatively for me to give up the dividends. 

 

For example, what if you do get a scenario like the one that the Fed tested?  It could very well be that the warrants may be worthless after 6 years if such a scenario came to fruition.  That's why I'm comfortable with the BAC warrants...they have the protection of the dividend payouts and the exercise price is around tangible book.  Cheers!

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The prospectus for the warrants is on EDGAR, in or around Spring 2009.

 

The warrants are dilution potected, in the case of a common stock issue.  They are not buy back protected.  In the event of a buy back you get a larger pie piece if you keep the warrants, same as holding the common. 

 

It would not surprise me if these banks buy in some warrants at some point in time through the open market, probably closer to conversion dates.  For now, I cant imagine a CEO forgoing his bonus to reduce dilution 6 years down the road. 

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Thanks Uccmal. If they warrants are not adjusted for buybacks than the warrants kind of leverage a buyback, so it's much better than a dividend.

 

But it seems you're wrong- WFC have already purchased quite a lot of warrants 2 years ago (less in the YTD), it makes sense to me that they'll buy more . it's not exaggerated to say that you won't be able to get them in the market 2-3 years from now.

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That's why I'm comfortable with the BAC warrants...they have the protection of the dividend payouts and the exercise price is around tangible book.  Cheers!

 

You need a price of 36.60 (including dividends) to make an additional 5x your money (from today's 4.60 price) in the BAC class A warrants.

 

Alternatively, the $3 strike 2014 calls make 5x your money at $33.

 

Strike price is $10 less.  Back in December (lowest point for the stock) the calls were worth more than $2 and the warrants fell to $2. 

 

The calls might be better at this point.  Take delivery when 2014 calls (using margin) and buy puts at $5 strike or $3 strike to hedge if margin makes you nervous.  Your margin loan will be largely paid off by the dividends over time -- probably roughly by 2019.  $3 puts will be so cheap that your dividend will easily cover it in addition to paying down your margin loan.

 

With the warrants, you'd be stuck putting in more cash at $10-$11 (hopefully not more than that) if you wanted to keep BAC, or selling the warrants and paying taxes. 

 

EDIT:  The calls carry a risk of being worthless if stock at or below $3 in 2014, and if the stock rebounds afterwards the warrants would have been the better bet.

 

But then again in 2019 what if the stock is $10?  I guess it comes down to how you feel about another big financial crisis in the next two years vs in 6-7 years time.

 

 

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But it seems you're wrong- WFC have already purchased quite a lot of warrants 2 years ago (less in the YTD), it makes sense to me that they'll buy more . it's not exaggerated to say that you won't be able to get them in the market 2-3 years from now.

 

Thanks for the info.  I hadn't actually checked.  Unless they offer me a substantial premium I will hang onto mine.

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Ericopoly

 

Thanks for your very informative posts on options. I have a basic options tax question, if someone buys 5 dollar calls12 months out and then exercises the options and continues to hold the stock, is that a taxable event? Is it different if the option is exercised less than 12 months?

 

Thanks!

 

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Ericopoly

 

Thanks for your very informative posts on options. I have a basic options tax question, if someone buys 5 dollar calls12 months out and then exercises the options and continues to hold the stock, is that a taxable event? Is it different if the option is exercised less than 12 months?

 

Thanks!

 

No, it's not a taxable event. 12 Months period is irrelevent here.

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