WFC - Wells Fargo

[LC]

Usually the solution to declining births per capita is immigration.

 

Cigarbutt, on the point of elderly: I believe we are also seeing the average length of life (at least of males) declining.

 

So to your point on old people working longer I agree - but perhaps not living longer. I believe as well that this is somewhat correlated with quality and access to healthcare.

 

My point here is that on this topic of declining population growth, the US does have options: (1) a natural demand for immigration both from the southern border and overseas; and (2) "room to improve" in its healthcare to catch-up to other comparable nations. Of course this would require policy changes from government but the conditions exist for those policies to succeed.

 

Finally, one item I regularly hear mentioned is a supply shortages for homes/high demand for new housing starts. I wonder how to reconcile this statement with the demographic trend.

 

 

[KJP]

 

My point here is that on this topic of declining population growth, the US does have options: (1) a natural demand for immigration both from the southern border and overseas; and (2) "room to improve" in its healthcare to catch-up to other comparable nations. Of course this would require policy changes from government but the conditions exist for those policies to succeed.

 

Another option is direct subsidies for children.  In other words, if a society wants something, create a financial incentive to produce it. 

 

 

Finally, one item I regularly hear mentioned is a supply shortages for homes/high demand for new housing starts. I wonder how to reconcile this statement with the demographic trend.

 

 

I would be cautious about any inference from housing shortage claims.  Housing supply shortages are local phenomenon because a house in Iowa City is not a substitute for a house in San Francisco.  So internal migration causing housing stock to be in the "wrong" place can create local housing shortages, even with no change to overall population. 

 

Also, household size is a major factor in the amount of housing needed.  There was a recent analysis of housing in St. Louis that examined the substantial decline in average household size and its effect on the number of houses needed, despite a huge decline in the overall population.  So, declines in average household size can significantly increase the demand for housing, even where the overall population is flat (or even declining).  Unfortunately I can't find a link to that study.   

 

Long story short, I'm not sure how much anecdotal reports about housing shortages really say about national demographic trends. 

[LC]

Fair points on geographies and average household size.

[ERICOPOLY]

Finally, one item I regularly hear mentioned is a supply shortages for homes/high demand for new housing starts. I wonder how to reconcile this statement with the demographic trend.

 

One explanation is that new household formation is not the same as population growth. 

 

New household formation was relatively depressed for a period of time as society transitioned to kids staying at home longer before moving out. 

 

There would be a relative acceleration of new household formation if that trend were to stall or reverse.

[LC]

That's a fair point as well, but over time I would expect housing starts to follow overall demographics:

 

Adjustment factors:

-regional variations

-quality of existing housing inventory

-temporal shifts as you mention (some generations stay @ home longer, then this pent up demand is released [or vice versa])

-household composition as KJP mentioned

 

All these factors combine and you get some curve which oscillates around the demographic movement. And the shape of that curve is pretty important to where WFC's mortgage business sits. 

[ERICOPOLY]

If the percentage of population that is spending is shrinking in the US and we aren’t replacing our population

 

The operative word here is 'percentage'.  The US population is growing.

 

If you take a simple example of 5 people in their 40s, and then add one more person aged 80, you now have 6 people and the percentage of the population that is spending is shrinking.  So what?  It takes more spending to support 6 people as compared to 5.

 

Right, but now you are assuming a lot and that goes back to the population pyramid which basically negates that simple example.

 

https://www.census.gov/library/stories/2019/12/new-estimates-show-us-population-growth-continues-to-slow.html

 

https://www.npr.org/2019/12/31/792737851/u-s-population-growth-in-2019-is-slowest-in-a-century

 

I haven’t assumed anything, I believe that you have misunderstood me.  I have previously stated that the age 25-40 demographic is larger than the age 40-55.  There will be more peak spenders, not less, and we will have an increase in the number of elderly who spend, albeit at lower levels.

 

https://www.federalreserve.gov/econresdata/notes/ifdp-notes/2016/effects-of-demographic-change-on-gdp-growth-in-oecd-economies-20160928.html

 

I turned to this today and I see that in Figure 4 it is projecting outcomes for 2010 and onward, and it shows that the shifting demographics have thrown their hardest punch over the past 10 years.  The drag on GDP growth is declining -- it literally projects that in one of the Figure 4 charts where it points to 2015 as the year of the most significant demographic drag on GDP.  Going forward it gets easier from here.

 

These are the US charts I'm singling out.

 

After making it through the strongest of the demographic headwinds, and not seeing deflation, these charts infer that we'll be less at risk with the headwinds abating over time from where we are now going forward.

[PJM]

So the general consensus by analysts in the market is that the only bank likely to have a deep cut in dividends is WFC. From the FED press release, it seems that dividends are capped at the current levels and based on average income for last 4 quarters. The avg. EPS for last 4 quarters is around 0.71 and the latest dividend is 0.51, so are the analysts factoring in dividend cut assuming the same payout ratio?

[Parsad]

So the general consensus by analysts in the market is that the only bank likely to have a deep cut in dividends is WFC. From the FED press release, it seems that dividends are capped at the current levels and based on average income for last 4 quarters. The avg. EPS for last 4 quarters is around 0.71 and the latest dividend is 0.51, so are the analysts factoring in dividend cut assuming the same payout ratio?

 

I think most people were already expecting a dividend cut by WFC.  The Fed just put their stamp on it and said that you can't pay out more than your income, and that's prudent.  It's extremely difficult, and I can't overstate that, exactly what is going to happen over the next several quarters.  The FED essentially said that our banks are strong, but we'll be prudent, examine things quarter by quarter, and then see how much capital can be returned to shareholders.  Banks have returned an enormous amount of capital over the last 5 years, and that will continue...just probably not for at least a year.  And they aren't alone in that...most companies will have to be prudent on how much capital is returned to shareholders over the next several quarters.  Cheers!

[mjs111]

Did anyone catch if the cap on dividends is calculated on all dividends or just the common stock dividend?  Looking at Wells Fargo:

 

Wells Fargo last 4 quarter's net income average: $3.59 billion

Wells Fargo next last 4 quarter's net income average assuming Q2 equals Q1: $2.2 billion

 

Wells Fargo quarterly common stock dividend payout: $2.03 billion

Wells Fargo quarterly preferred stock dividend payout: $0.28 billion

------------------------------------------------------------------------------

total quarterly dividend payout: $2.31 billion

 

 

It's a small detail in the scheme of things, just curious.  Everything I've read so far just says "dividends."

 

 

Mike

[Parsad]

Did anyone catch if the cap on dividends is calculated on all dividends or just the common stock dividend?  Looking at Wells Fargo:

 

Wells Fargo last 4 quarter's net income average: $3.59 billion

Wells Fargo next last 4 quarter's net income average assuming Q2 equals Q1: $2.2 billion

 

Wells Fargo quarterly common stock dividend payout: $2.03 billion

Wells Fargo quarterly preferred stock dividend payout: $0.28 billion

------------------------------------------------------------------------------

total quarterly dividend payout: $2.31 billion

 

 

It's a small detail in the scheme of things, just curious.  Everything I've read so far just says "dividends."

 

 

Mike

 

Can't say for sure, but I would imagine it would be both, otherwise banks could go the preferred route when raising capital...as it becomes more appetizing for dividend shareholders.  Cheers!

[benchmark]

Did anyone catch if the cap on dividends is calculated on all dividends or just the common stock dividend?  Looking at Wells Fargo:

 

Wells Fargo last 4 quarter's net income average: $3.59 billion

Wells Fargo next last 4 quarter's net income average assuming Q2 equals Q1: $2.2 billion

 

Wells Fargo quarterly common stock dividend payout: $2.03 billion

Wells Fargo quarterly preferred stock dividend payout: $0.28 billion

------------------------------------------------------------------------------

total quarterly dividend payout: $2.31 billion

 

 

It's a small detail in the scheme of things, just curious.  Everything I've read so far just says "dividends."

 

 

Mike

 

I think so. And if the cap is at the current level, maybe the 'deep cut' of dividend at WFC isn't going to be that deep.

[meiroy]

Did anyone catch if the cap on dividends is calculated on all dividends or just the common stock dividend?  Looking at Wells Fargo:

 

Wells Fargo last 4 quarter's net income average: $3.59 billion

Wells Fargo next last 4 quarter's net income average assuming Q2 equals Q1: $2.2 billion

 

Wells Fargo quarterly common stock dividend payout: $2.03 billion

Wells Fargo quarterly preferred stock dividend payout: $0.28 billion

------------------------------------------------------------------------------

total quarterly dividend payout: $2.31 billion

 

 

It's a small detail in the scheme of things, just curious.  Everything I've read so far just says "dividends."

 

 

Mike

 

I think so. And if the cap is at the current level, maybe the 'deep cut' of dividend at WFC isn't going to be that deep.

 

What if this quarter is the Q from hell with provisions higher than "expected"?

[compoundvalue]

Curious as to what people think re the potential effect of a dividend cut on pricing of LEAPS? On the one hand the stock price might get a hit from the cut, on the other hand cost of LEAPS goes down

[LC]

Short term I would expect a dividend cut to hurt call options. Long term I would expect a negligible effect

[sleepydragon]

Curious as to what people think re the potential effect of a dividend cut on pricing of LEAPS? On the one hand the stock price might get a hit from the cut, on the other hand cost of LEAPS goes down

 

Call options use expected dividend rates for pricing. The higher the dividends the lower the call price. So dividends cuts are positive for the time value/premium of the options.

[sundin]

Curious as to what people think re the potential effect of a dividend cut on pricing of LEAPS? On the one hand the stock price might get a hit from the cut, on the other hand cost of LEAPS goes down

 

Call options use expected dividend rates for pricing. The higher the dividends the lower the call price. So dividends cuts are positive for the time value/premium of the options.

 

Yes the dividend cut would increase the value of the call however the fall in the underlying stock price would decrease it. The net effect is harder to determine with LEAPs.

[bizaro86]

Curious as to what people think re the potential effect of a dividend cut on pricing of LEAPS? On the one hand the stock price might get a hit from the cut, on the other hand cost of LEAPS goes down

 

Do you think WFC is a fundamentally good business? If so, maybe try inverting.

 

Take a good business that pays zero dividends (say BRK) and think what would happen if they started paying a dividend. My prediction is that if BRK started paying a dividend that would reduce the growth in book value by the amount of the dividend, but that it would immediately trade at a higher valuation multiple. Over a very long period this would hurt call options, but I think the valuation gains from paying the dividend would make it still a net-positive over the term of a LEAP (2 years or less).

 

Going through this, I think the opposite is true for WFC. While no dividend would mean they increased book value per share, I think it would cause enough selling that P/TBV would decline enough to offset it.

[sundin]

Like other banks, WFC generates more cash flow than it can reinvest at attractive rates of capital, its investment thesis is based on returning capital via repurchases and dividends. BRK's value is based on Warren's ability to grow at greater than average IRR w/ sufficient dry powder on hand.

 

Capital allocation decisions are different in that banks need dividends to distribute excess cash flow to not destroy value - would not equate this to it being a bad business.

 

 

[gary17]

Does anyone know if / when they would release the dividend plan for the next year... this is usually released after CCAR but i guess this is a different year...

thanks !

[dcollon]

https://newsroom.wf.com/press-release/corporate-and-financial/wells-fargo-issues-statement-regarding-federal-reserves

[changegonnacome]

Dividend cut now confirmed (finally) & hopefully large CECL loan loss reserving in Q2 using an adverse scenario.......barring an extreme second waves the next few years should hopefully have a stream of 'wins' for Scharf - asset cap lifted, expense ratio reduced to peer levels, loan loss reserves released back

[Parsad]

Dividend cut now confirmed (finally) & hopefully large CECL loan loss reserving in Q2 using an adverse scenario.......barring an extreme second waves the next few years should hopefully have a stream of 'wins' for Scharf - asset cap lifted, expense ratio reduced to peer levels, loan loss reserves released back

 

This situation is not that dissimilar to BAC back in 2012 after it was coming out of the financial crisis and had a number of issues and setbacks to deal with along the way.  Cheers!

[changegonnacome]

The challenges faces WFC now all fall in the ‘doable’ bucket - that’s not to minimize them, it will require focused resolve & perseverance with top notch execution. Think Scharf’s elevation to world class CEO rests on this ‘outsider’ pulling off the turnaround story and I like the setup as a result.

[Foreign Tuffett]

Any predictions for where they will set the new dividend level? I have no clue...maybe they will cut it in half to $0.25 per Q?

 

 

[gary17]

i project same dividend yield as BAC