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When I wrote about Wells Fargo (NYSE:WFC) 8 months ago, it was trading at $36.99 and had a dividend yield of 3.24%. Since then, it has gone up by 19.0%, reaching $44.02. At this level, the yield has dropped to 2.73%. However, I still believe WFC is a great stock, and in this article, I'll explain why.

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(Picture from Google Finance)

Recent results

Wells Fargo currently pays a quarterly dividend of $0.30 per share, giving it a dividend yield of 2.73% at the current price per share of $44.02. WFC has a very low payout ratio, as can be seen in the table below:

 

Earnings per share ($)

Dividends paid ($)

Payout ratio (%)

Q1 2013

0.92

0.25

27.2

Q2 2013

0.98

0.30

30.6

Q3 2013

0.99

0.30

30.3

First 9 months 2013

2.89

0.85

29.4

The average payout ratio for the first 3 quarters of the current fiscal year is only 29.4%. This means the dividend can easily be sustained, even if the earnings per share were to go down.

WFC's first 3 quarters have been nothing short of amazing. In each of the 3 quarters, WFC has had double digit growth in net income, compared to the same quarter last year. Net income was up 17.8% over the first 9 months, reaching $16.26 billion.

Net income (in $millions)

2012

2013

Change

Q1

4248

5171

+21.7%

Q2

4622

5519

+19.4%

Q3

4937

5578

+13.0%

First 9 months

13807

16268

+17.8%

Future expectations

Analysts expect WFC to have earnings per share of $4.01 in fiscal year 2014. This means, if the dividend stays the same, WFC's payout ratio will remain under 30%. A dividend increase to $0.35 per quarter would raise the payout ratio to 35%, while a quarterly dividend of $0.40 (yielding 3.63% at current prices) would lead to a payout ratio of 40%.

Analysts expect WFC's revenue to reach $84.17 billion in the current fiscal year, which is a slight decline to last year's $86.08 billion. WFC's revenue is expected to recover slightly in 2014, reaching $84.97 billion.

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Valuation and conclusion

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The graph above displays the price to earnings ratios for WFC over the past couple of years. At a price of $44.02 per share, WFC is trading at only 11 times expected earnings for the next year. This is close to its competitors Bank of America (NYSE:BAC), which is trading at a forward p/e of 11.8, and Goldman Sachs (NYSE:GS), which has a forward p/e of 11.1.

I believe that, despite the recent increase to $44.02 per share, WFC is still a great stock for investors looking for a large, sustainable dividend. Wells Fargo's low payout ratio means its dividend is very safe, and with earnings per share expected to increase to $4.01 next year, I wouldn't be surprised to see a dividend increase of $0.05 or $0.10 per quarter somewhere in the next twelve months.

What's your view on WFC? Please comment below!

Source: Wells Fargo's Strong Dividend Makes It A Great Stock For Dividend Growth Investors