The $7.3 billion Wells Fargo & Co. spent on share repurchases during the fourth quarter failed to prop up its stock price, but it effectively helped the bank one-up its blue-chip rival JPMorgan Chase & Co. with an earnings beat. Was it worth it?
With the stock WFC, +1.58% closing Tuesday down 1.6%, as the earnings beat was offset by a revenue miss -- revenue can’t be influenced by share repurchases -- it’s understandable for investors to believe it was a pretty bad trade.
Wells Fargo reported fourth-quarter net income applicable to common stock slipped to $5.711 billion from $5.740 billion, but diluted earnings per share (EPS) rose to $1.21 from $1.16. That’s because the diluted average common shares outstanding for the quarter, the denominator of the EPS calculation, declined to 4.701 billion from 4.963 billion.
The average EPS estimate of analysts surveyed by FactSet was $1.19. The earnings beat by Wells, which has been rocked by fake-account sales practice and improper loan-charge scandals, comes after two straight misses, and four misses in the past five quarters.
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Meanwhile, JPMorgan JPM, +1.62% reported fourth-quarter EPS that rose to $1.98 from $1.07 a year ago, but missed the FactSet consensus of $2.20, to break a 15-quarter streak of beats.
During the latest quarter, Wells said it spent $7.299 billion to buy back 142.7 million common shares, implying an average price paid per share of $51.15.
If Wells didn’t buy back any shares during the quarter, that would imply diluted average common shares outstanding of 4.844 billion (4.856 billion including issuances), which would put EPS at $1.18, or a penny below the FactSet consensus.
Meanwhile, Wells’s stock tumbled 12.3% during the quarter. Although it has bounced slightly since Dec. 31, it closed at $47.67 on Tuesday.
That puts the stock 6.8% below the average buyback price, which suggests the value of the shares repurchased would now be $6.803 billion, or about $496 million less than what Wells paid.
In comparison, JPMorgan said it spent about $5.9 billion to buy back 55.5 million shares at an average price of $106.80. The stock is currently trading about 4.7% below that price.
Over the past 12 months, Wells’s stock has dropped 23.7% although the bank spent a net $17.9 billion on share repurchases. Over the same time, JPMorgan’s stock fell 9.4%, the SPDR Financial Select Sector exchange-traded fund XLF, +1.72% dropped 14.6% and the Dow Jones Industrial Average DJIA, +1.38% slipped 6.7%.