RD's Picks

One of my core holdings in SLO (Strategy Lab Open) and real life is Wells Fargo (WFC). With the stock price hitting new lows recently, I wanted to review that holding to see if it's time to disembark from one of my dividend stocks.

The first step in that evaluation is to review why I bought the stock in the first place. The main focus for my IRA account is to establish a team of dividend paying stocks that will generate income. WFC is part of that core, so I'm less concerned about price fluctuation than I am with the dividend prospects.

Unless you've been living under a rock, you're well aware of credit problems in the financials and the big write-downs most of these companies have been taking.

WFC hasn't been immune from these problems, but recent quarterly reports still show earnings that comfortably cover the dividend payout. Recently, Richard Bove lowered his earnings estimates and price targets for WFC. But, his price target of $29 is well above today's price and the earnings estimates for 08 and 09 comfortably cover the dividend payout.

The financial stocks that have been hammered the hardest have typically been caught in positions where they needed to raise capital, diluting current shareholders. In every case I'm aware of, an announcement to raise capital has been followed by substantially lower share prices and, frequently, dividend cuts.

I'd consider any event that jeopardizes long-term income prospects for this stock a sell signal. Most significantly, if they announce a need to raise capital, I'd sell immediately. Recent market action is very clear. If you still like the company, you'll get a chance to buy it back much lower. And most financials that have needed to raise capital have followed that up with more bad news.

To date, WFC isn't acting like a company that needs to raise capital. Significantly, they've been acquiring businesses and expanding operations. Recently, they've acquired Farmers State Bank of Fort Morgan, Colorado, Transcap Associates, and expanded operations in Oklahoma. Nothing earth shattering, but also not actions consistent with a company that thinks it will need to raise capital. So not bad for one of my dividend stocks.

I'll also be watching for the next earnings report and dividend announcement. WFC has a long track record of annual dividend hikes and the next announcement will tell whether they continue that track record. I won't necessarily sell if they don't raise, but if that were accompanied by troubling earnings..... I'm guessing there'll be a nominal dividend hike to keep the string of annual increases running.

Long term, I think WFC is well positioned to pick up business as weaker competitors either fall out or just can't take advantage of opportunities.

Bottom line, I'm nervous about holding a company in a very troubled sector. But, I still believe WFC will do what I bought it to do - crank out dividend income for a long time. Unless they announce a need to raise capital or earnings get to a point that they don't support the dividend, I'll continue to add small buys going forward, mostly just reinvesting dividends. I'll also continue to look for opportunities to trade a little around my position.

Comments: View Comments |  Wednesday June 25, 2008  |  Stocks: WFC,