Wells Fargo authorizes spending $30 billion on share buybacks

Wells Fargo & Co.'s board of directors has chosen to make a major statement with Tuesday's authorization of a new stock-repurchase program worth up to $30 billion.

Some analysts say the decision is a prudent use of excess capital by the board and bank.

However, they stress it doesn't make amends to shareholders for the $1.97 trillion asset cap limitations established in February 2018 by the Federal Reserve in response to the fraudulent customer account scandal and other high-profile regulatory issues.

"If not for the continuing management screw-ups at the bank, it wouldn't be under a mandated asset cap in the first place, and it could likely invest its current surplus capital into the growth of its business," said Tony Plath, a retired finance professor at UNC Charlotte.

"All things considered, this would be a vastly superior route to corporate value creation for Wells Fargo's shareholders."

At Tuesday's closing price of $45.48, Wells Fargo could repurchase up to 659.6 million shares of its common stock - or 17.9% of its current 3.67 billion outstanding shares.

The board also approved - as expected - increasing its quarterly dividend by 5 cents to 35 cents. The dividend is payable Sept. 1 to shareholders registered as of Aug. 4.

The board said the share-repurchase program "will be executed consistent with the company's internal capital adequacy framework that considers current market conditions, potential changes to regulatory capital requirements, and other risk factors."

Chief executive Charlie Scharf said in a statement that the bank's "first priority remains investing in our risk and control infrastructure, but we are also investing in providing updated capabilities to our customers and supporting our employees and communities."

"Even with these significant investments, our capital levels are strong and we expect them to remain so, allowing us to return excess capital to our shareholders."

The two financial boosts to Wells Fargo shareholders come after the Federal Reserve signed off June 29 on the nation's 23 national and super-regional banks increasing quarterly dividends and authorizing larger share-purchase programs.

The Fed's board of governors said the 23 banks passed their annual stress tests, as required by the federal Dodd-Frank Act.

The tests determine whether those banks have enough capital to weather a significant economic downturn and maintain a normal customer lending capability. They evaluate the resilience of large banks by estimating their capital levels, losses, revenue and expenses under hypothetical scenarios over nine future quarters.

Wells Fargo reported July 14 that it spent $4 billion to repurchase 100.2 million shares during the second quarter. It has spent $8 billion for fiscal 2023 through June 30.

"While any changes to regulatory capital requirements are expected to be phased in gradually over several years, we are considering the potential impact in contemplating the amount of our future repurchases," Scharf said.

Asset cap ripple effect

Wells Fargo is in its fifth year of a Federal Reserve-mandated asset cap of $1.97 trillion that was put in place in February 2018.

Wells Fargo also has dealt with a series of regulatory and other federal fines and consent orders since September 2016 that have added up to at least $11.54 billion as of Tuesday.

Because the asset cap restrictions affect the growth of the balance sheet, increasing the quarterly dividend and the number of repurchased shares are ways that Wells Fargo can boost shareholder return with its increasing profitability, Plath said.

"Wells Fargo is clearly doing the right thing in returning capital to its shareholders since the company is unable to use its surplus capital to grow its business under its prudentially mandated asset cap," Plath said.

"Because the bank has been continuously profitable over the past several years, and the asset cap has been in effect for such a long period of time, Wells Fargo finds itself in the unique position of simply having too much capital due to the accretive effect of regular annual earnings retention over time."

Bowman Gray IV, a local independent stockbroker, said that while the share repurchase program "demonstrates the bank's financial health, it was also a move to reward patient shareholders who have been sitting on a stock that has been range bound for years."

"This may quiet shareholder discontent for a while."

rcraver@wsjournal.com336-727-7376@rcraverWSJ