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It Might Not Be A Great Idea To Buy Wells Fargo & Company (NYSE:WFC) For Its Next Dividend

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Simply Wall St
·3 min read
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Readers hoping to buy Wells Fargo & Company ( NYSE:WFC ) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 4th of February in order to receive the dividend, which the company will pay on the 1st of March.

Wells Fargo's upcoming dividend is US$0.10 a share, following on from the last 12 months, when the company distributed a total of US$1.22 per share to shareholders. Based on the last year's worth of payments, Wells Fargo stock has a trailing yield of around 1.3% on the current share price of $29.88. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View 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 294% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business.

Generally, the higher a company's payout ratio, the more the dividend is at risk of being reduced.

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

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Wells Fargo's earnings per share have plummeted approximately 37% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. 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 294% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Has Wells Fargo got what it takes to maintain its dividend payments? Not only are earnings per share shrinking, but Wells Fargo is paying out a disconcertingly high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Wells Fargo. Our analysis shows 3 warning signs for Wells Fargo and you should be aware of these before buying any shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.