Wells Fargo Preferred Stocks Offer 6.4% Yield Amid High-Interest Rates

Wells Fargo & Company (WFC.US) has recently attracted significant attention due to its preferred stocks offering an attractive yield of 6.4%. This high yield, combined with a favorable risk-return ratio, makes the bank's preferred stocks a compelling investment option, particularly in the current high-interest rate environment. Analysts highlight that Wells Fargo only needs to allocate approximately 6% of its net income to pay dividends on its preferred stocks, providing a strong coverage and security for preferred stockholders.

The bank's Z-series preferred stocks are currently trading at a discount, which not only enhances the yield but also offers potential capital gains if interest rates decline in the future. This makes Wells Fargo's preferred stocks an attractive fixed-income opportunity, according to analysts.

Wells Fargo's recent first-quarter financial report revealed a decrease in total interest income by nearly $20 billion, while interest expenses decreased by approximately $11 billion. The net interest income stood at $115 billion, marking a 6% year-over-year decline. Fortunately, non-interest expenses decreased by about $4.5 billion, and non-interest income remained relatively stable, partially offsetting the decline in interest income. Consequently, the pre-tax and loan loss provision profit was $62 billion (compared to $66 billion in the previous year). Due to reduced tax liabilities, net income increased to $48 billion. After accounting for losses attributable to minority shareholders, the net income attributable to Wells Fargo shareholders was approximately $49 billion. As per the financial report, the bank only needs $2.78 billion to pay dividends on its preferred stocks. This implies that the net income available for common stockholders is $46 billion, corresponding to an earnings per share (EPS) of $1.41. More importantly, from the perspective of preferred stockholders, the bank uses less than 6% of its net income to pay preferred stock dividends.

The yield on Wells Fargo's Z-series preferred stocks, along with the potential for capital gains if interest rates decline in the future, presents an attractive proposition. Fixed-rate preferred stocks, with relatively low fixed dividends, may see their stock prices rise when interest rates fall, resulting in capital gains (assuming the risk premium remains unchanged).

Wells Fargo's Z-series preferred stock (WFC.PR.Z) currently offers an annual fixed preferred dividend of $1.1875, corresponding to a nominal yield of 4.75% based on a face value of $25. However, the stock is currently trading well below its $25 face value, with a current trading price of approximately $18.54. This means that the $1.1875 annual dividend corresponds to an actual preferred stock yield of 6.4%. Compared to the current five-year U.S. Treasury yield, this represents a premium of approximately 235 basis points.

As Wells Fargo's asset base expands, its earnings capacity is expected to strengthen, thereby enhancing the coverage ratio of its preferred dividends. Additionally, Wells Fargo's preferred stocks are unlikely to be significantly impacted, as these securities are viewed as fixed-income investment tools. With a current preferred stock yield of 6.4%, the risk-return ratio for Wells Fargo's preferred stocks is exceptionally favorable.