Here’s Why We’re Wary Of Buying Wells Fargo’s (NYSE:WFC) For Its Upcoming Dividend

Wells Fargo & Company (NYSE:WFC) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 6th of August will not receive this dividend, which will be paid on the 1st of September.

Wells Fargo’s next dividend payment will be US$0.10 per share, and in the last 12 months, the company paid a total of US$0.40 per share. Based on the last year’s worth of payments, Wells Fargo stock has a trailing yield of around 1.6% on the current share price of $24.26. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Wells Fargo has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Wells Fargo

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Wells Fargo paid out a disturbingly high 217% of its profit as dividends last year, which makes us concerned there’s something we don’t fully understand in the business.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Wells Fargo’s earnings per share have fallen at approximately 26% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Wells Fargo has delivered 7.2% dividend growth per year on average over the past 10 years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Wells Fargo is already paying out a high percentage of its income, so without earnings growth, we’re doubtful of whether this dividend will grow much in the future.

Final Takeaway

Should investors buy Wells Fargo for the upcoming dividend? Not only are earnings per share shrinking, but Wells Fargo is paying out a disconcertingly high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. This is not an overtly appealing combination of characteristics, and we’re just not that interested in this company’s dividend.

With that being said, if you’re still considering Wells Fargo as an investment, you’ll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for Wells Fargo and you should be aware of them before buying any shares.

If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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Source: https://finance.yahoo.com/news/heres-why-were-wary-buying-141333822.html