Wells Fargo to Cut Dividend While Other Big Banks Hold Payouts Steady

June 29, 2020 5:50 pm ET

Wells Fargo & Co. said it expects to cut its dividend for the first time in more than a decade to preserve capital to weather the coronavirus pandemic.

The fourth-largest U.S. bank by assets said Monday it would cut its dividend from the 51 cents it paid in each of the four most-recent quarters. The bank said it would announce its payout when it reports second-quarter earnings on July 14.

The other big U.S. banks — JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley — said they intend to hold their dividends steady. Still, this would be the first time any of the major banks reduced its per-share payout since the second quarter of 2009, when they faced an existential threat from the housing crisis

Banks are in a much stronger position now than they were during the past financial crisis. But with the outlook highly uncertain because of the pandemic-induced economic collapse, the Federal Reserve asked banks last week not to increase their dividends. The central bank said that in a worst-case scenario in which the economy takes a long time to recover, banks could face as much as $700 billion in loan losses.

The Fed also said last week that lenders couldn’t pay a dividend in excess of average quarterly earnings between the third period of last year and the second period of this year. As a result, some investors and analysts believed that Wells Fargo, whose earnings declined sharply to start the year, would have to cut its dividend.

Wells Fargo executives hadn’t committed to keeping the dividend intact, instead saying they would have to evaluate the Fed’s guidance and the bank’s own earnings power. The bank earned $653 million in the first quarter, down 89% from a year earlier. Chief Executive Charles Scharf has said earnings are expected to be similarly weak in the second quarter. In a statement Monday, he said he expects the bank will need to make a bigger increase in its allowance for credit losses than in the first quarter.

“There remains great uncertainty in the path of the economic recovery and though it’s difficult to accurately predict the ultimate impact on our credit portfolio, our economic assumptions have changed significantly since last quarter,” Mr. Scharf said.

The biggest banks all posted lower profits in the first quarter, and they socked away billions of dollars to deal with soured loans. But Wells Fargo’s business lines were already struggling pre-pandemic; the bank’s fake-account scandal of four years ago has crimped revenue growth and forced it to lean on cost cutting.

The potential for a dividend cut has been a concern among Wells Fargo investors in recent months. The bank’s share price has more than halved in 2020, putting in the worst performance of the six largest banks. The KBW Nasdaq Bank Index was down 36% for the year and the S&P 500 was down 5.5%.

The Federal Reserve also asked banks not to repurchase their own shares in the third quarter. Banks had previously committed to halting buybacks through the second quarter.

div·i·dend yield

1. a dividend expressed as a percentage of a current share price.

How is the interest rate of an I bond determined?

The interest rate combines two separate rates:

• A fixed rate of return, which remains the same throughout the life of the I bond.
• A variable semiannual inflation rate based on changes in the Consumer Price Index for all Urban Consumers (CPI-U). The Bureau of the Fiscal Service announces the rates each May and November. The semiannual inflation rate announced in May is the change between the CPI-U figures from the preceding September and March; the inflation rate announced in November is the change between the CPI-U figures from the preceding March and September.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 8.5 percent over the last 12 months to an index level of 287.504 (1982-84=100). For the month, the index increased 1.3 percent prior to seasonal adjustment.

What interest will I get if I buy an I bond now?

The composite rate for I bonds issued from November 2021 through April 2022 is 7.12 percent. This rate applies for the first six months you own the bond.

A Year of Inflation-Beating Yields With No Risk? Time May Be Running Short

April 14, 2022, 2:31 PM PDT

Their returns are high, their risks almost nil. They perform best during bouts of inflation and to some investors, they may simply sound too good to be true. But there’s a catch: Time to take best advantage of I bonds for the next year may be running short.

Series I savings bonds from the U.S. Treasury have exploded in popularity over the past few months. The Treasury issued $1.4 billion in March, in line with months of surging sales that began late last year.

Inflation explains their appeal. The U.S. consumer price index surged last month by 8.5%, the most since 1981, and I bond yields rise with inflation. So based on March’s price levels relative to September’s, the yield on Series I savings bonds should increase to 9.62% beginning May 1. That’s a big jump from the current rate of 7.12%.

“It’s potentially a rare moment in time,” said David Sterman, president of Huguenot Financial Planning in New Paltz, New York. “You’re just not going to find a guaranteed rate of return like this anywhere else.”

Should investors seeking higher returns wait for that May rate reset? Possibly not. Counterintuitively, locking in the current 7.12% rate now may ensure a higher overall yield for the next 12 months. To explain how that’s possible, Bloomberg News spoke with financial advisers across the U.S. who have been recommending I bonds to their clients.

Here are their strategies:

Mind the Six-Month Cycle

Before dashing into I bonds, it’s important to understand how they work.

The government has been selling Series I bonds since 1998, up to a maximum limit of $10,000 per person each calendar year. They are considered extremely low risk because they are guaranteed by the U.S. They were intended to help Americans protect their savings from inflation. To this end, their interest rate is made up of two components: a fixed rate of return, and a variable rate which is set twice a year and rises and falls with the headline consumer price index.

The Treasury Department sets this variable rate, on the first business day of May and November. The rate for an investor’s bond changes every six months from the date it was purchased, according to TreasuryDirect, the government’s electronic marketplace.

The Treasury’s schedule shows that a Series I bond purchased at any point in April would maintain that month’s effective rate — which was set on the first business day of last November — until Oct. 1. At that point, the bond would assume the rate set on May 1 for the next six months.

Given that idiosyncrasy, someone who purchased in April at the 7.12% rate would lock that in for around six months. On Oct. 1, the rate set on May 1 — which is likely to be 9.62% — would then take effect for the next six months. That amounts to roughly 12 months of guaranteed, elevated yields.

Contrast that with someone who waits until the 9.62% kicks in. Yes, that buyer would have a higher guaranteed rate until Nov. 1 of 9.62% instead of 7.12%. But the variable rate changes on the first business day of November. If inflation continues to climb, that rate might end up even higher. But if, as some predict, inflation declines by then, that investor runs the risk of clocking in a lower rate for the next six months.

“I would go ahead and sign up for the April rate and get six months at that rate and then get the six months of the May-to-November rate because you’re pretty much guaranteed at least 12 months of seven-plus percent of return,” said John Crumrine, founder of Brunswick Financial in Ocean Isle Beach, North Carolina.

He doesn’t expect inflation to drop dramatically six months from now, but he also doesn’t rule out the possibility that the November adjustment takes the Series I variable rate down to 3% or 4% if suddenly the U.S. Federal Reserve acts more aggressively and does manage to bring inflation under greater control.