Wells Fargo Stock Can Rise 22% if the Dividend Keeps Increasing

Wells Fargo (NYSE:WFC) just doubled its quarterly dividend per share from 10 cents to 20 cents. This raised the dividend yield for WFC stock to 1.64% as of Aug. 9.

Additionally, Wells Fargo just reported excellent earnings with a good increase in its tangible book value per share (TBVPS). I estimate WFC stock is worth at least $60 per share as a result, compared to its Aug. 9 price of $48.65. That represents a potential upside of 22% for investors in Wells Fargo stock.

Why Wells Fargo Stock Will Rise

There are a number of reasons why WFC stock could rise more than 22% to $60 this year. First of all, the bank holding company is likely to keep raising the dividend.

Last year, Wells Fargo cut the quarterly dividend from 51 cents per share to 10 cents. The recent dividend raise indicates it can return to that number. In fact, its annual 80 cents dividend represents just 20% of its $4.05 estimated earnings per share (EPS) this year, according to Seeking Alpha. If it restored the 51 cents quarterly dividend ($2.04 annually), that would be about half of its annual EPS.

So, for example, let’s see what would happen with a 30 cents quarterly dividend — which is less than halfway to a 51 cents dividend — and a 2% dividend yield.

If we divide $1.20 (i.e., 30 cents times 4) by 2%, the price target works out to $60 per share. This is based on the assumption that management will raise the dividend again to 30 cents per quarter.

Price-to-Tangible Book Value Per Share

Another reason WFC stock can rise is that the TBVPS is likely to increase at least 12% or so this year. As of June 30, its TBVPS was $34.95, which was 10.8% higher than the $31.52 TBVPS in the same quarter last year. This can be seen on page three of the bank’s quarterly supplement.

But in this past quarter, the bank started buying back shares. So if you add in a buyback effect, the net increase in the TBVPS will be 12% instead of 10.8%. Here is how that will work. If we multiply $34.95 by 1.12, the new TBVPS will be $39.14 next year. Then we can multiply this by the price-to-TBVPS multiple.

Right now WFC stock trades for 1.39 times its TBVPS (i.e., $48.65 divided by $34.95.) With the buybacks and higher dividends, I believe that Wells Fargo shares will have a 1.5 price-to-TBVPS multiple. That raises the price target to $58.71 (i.e., 1.5 times $39.14.) This is close to my $60 price target as well.

Where This Leaves WFC Stock

Additionally, Morningstar says the company’s average price-to-earnings (P/E) ratio over the past five years has been 20.4 times earnings. Applying this to analysts’ earnings estimates for 2022 yields a price target of $73.23. Here is how that works: Multiply Seeking Alpha’s Aug. 9 average analyst estimate for 2022 of $3.59 EPS by 20.4 to get $73.23.

There is ample evidence to show WFC stock will rise to at least $60. Using a dividend yield forecast and assuming dividends rise 50% to 30 cents per quarter, the target is $60 per share with a 2% yield. Using a TBVPS estimate, assuming 12% growth and a 1.5x multiple, the price target is $58.71. And finally, using a historical P/E method, the price target is $73.23.

The average of these three methods works out to $63.98 per share. This is 6.6% higher than my target price of $60, but we will stick with the latter for now to be conservative.

What To Do With WFC Stock

Don’t be surprised if you see Wells Fargo increase its dividend before the end of the year. I believe between that and its buyback program, management is looking to push WFC stock much higher.

For example, last quarter Wells Fargo bought back $1.6 billion of its own shares. If it keeps that pace up, this would be $6.4 billion annually. That works out to 3.2% of its $200 billion market value. In other words, in addition to its 1.64% dividend yield, management can provide a 3.2% buyback yield.

That has three immediate benefits. First, it pushes the stock price higher by soaking up weak sellers’ shares. Second, it increases the earnings per share over time with the same earnings. And third, it increases the dividends per share for the dollar amount of dividends paid out.

Given this ample evidence that WFC stock is likely to move higher, this looks like a good bargain over the next year.