Wells Fargo slashes dividend 85%

Wells Fargo & Co., among the last of the major banks to keep its quarterly dividend intact amid a worldwide credit crunch, finally threw in the towel Friday and slashed its dividend 85 percent.

In doing so, the San Francisco-based bank sent a message to the market that it expects loan losses to continue to accelerate in an economy that is hemorrhaging jobs at a pace not seen in more than 60 years.

Though widely expected, the dramatic dividend cut -- from 34 cents to 5 cents per common share -- illustrated how rapidly Wells Fargo's fortunes have changed.

Just a year ago, Institutional Investor named Wells Fargo "the most shareholder friendly company in America among banks," in part because of its track record of paying dividends. Last July, Wells Fargo upped its dividend 10 percent and boasted that it was the bank's "21st consecutive year" of dividend increases.

But in the months that followed, it became increasingly clear to investors that Wells Fargo's payouts to shareholders were unsustainable. Even though the bank appeared to be weathering the credit crisis better than many of its big-bank peers were, its bold acquisition last year of ailing Wachovia left it saddled with billions of dollars in souring mortgage loans in some of the nation's worst housing markets. In the fourth quarter, the bank posted a $2.55 billion loss, largely because it had to set aside more money to cover loan losses.

By this month, Wells Fargo's dividend yield hit an all-time high of nearly 13 percent -- a level considered unthinkable a year ago. A high dividend yield can signal that a bank is about to cut its dividend. That's because dividend yields rise when stocks fall in anticipation of profit declines. "That dividend is toast," said Mark Henneman of St. Paul-based money management firm Mairs & Power, in an interview earlier this week.

Still, investors appeared to be bracing for worse. After surging 17 percent in early trading after the announcement, the stock closed up 49 cents, or 6 percent Friday, to $8.61 a share.

Though a dividend cut is never an easy message to deliver, Wells Fargo tried to soften the blow, pointing out that the bank had seen "strong operating results" for the first two months of 2009, including continued growth in lending, deposits and mortgage volumes. The bank noted that mortgage originations for the first two months were $59 billion, exceeding the fourth quarter of last year, and its merger with Wachovia was on track "and we remain as optimistic as ever about its potential benefits for all our stakeholders."

Wells Fargo's decision to maintain a nickel dividend had "symbolic value," said Tony Plath, a finance professor at the University of North Carolina at Charlotte. It sent a message, he argued, that the bank considered its loan problems serious -- but not as serious as those at Citigroup and Bank of America, which each cut their dividends to a cent. Setting its dividend at 5 cents, Wells Fargo aligned itself with J.P. Morgan Chase and U.S. Bancorp, which cut their dividends to a nickel.

It also set Wells Fargo apart from the 60-plus banks nationwide that have suspended their dividends entirely since the beginning of 2008.

"There is a whole psychology behind these dividend numbers," Plath said. "Wells Fargo is saying things are bad, but they're not falling apart just yet."