Dividends and Wells Fargo fined

Prior to September 8th, if you had asked what is the best US bank stock to own one of your top choices would be Wells Fargo led by President John Stumpf. The bank specializes in residential and commercial loans and more importantly did not have to write off billions of mortgages due to the mortgage back securities downfall. The bank seemingly did what was right thing for banks to do and consistently earned money for its shareholders. Then on September 8 it revealed the bank had let go five thousand people who had entered 2 million names for products and services without authorization from those 2 million people or customers. Perhaps the bonus or reason for doing it was to increase existing customers using Wells Fargo services. If you had a mortgage you were given a credit card or line of credit or something where fees could be charged, since September 8th Wells Fargo paid a fine for opening the accounts. The fallout has been the stock fell from the low 50’s to the low 40’s and senior management has been concerned about this issue for the past month and will have to deal with it for the next few quarters and new faces in the executive suite. In the banking business as well as the service business the business you are selling is trust, integrity and reliability. If the first two go – the trust and integrity then people will quickly look to alternatives and there are many. It will be a very hard sell and will need a number of new faces to regain the past trust.

Linking to dividend paying stocks, it is accepted these stocks have a long history of paying their dividends as they are profitable companies. In every business, there are areas of the business where the selling is hard and gaining market share is critical, so things happen. The difference is with dividend paying companies, they should have been through that cycle and not have to do what Wells Fargo did. The consequences means doing everything perfect for the next few years (which many institutions rarely do) and trying to regain the trust of its people. Essentially someone has to contact all its profitable customers to retain the bulk of their business with Wells Fargo. It can be a very good thing to do – if done right and there maybe some customers who will increase their business because of the reaching out. No one can predict what happened at Wells Fargo, but there is expectation the bank could come out of the woods knowing what can not be done in the future.

There are more questions than answers, till the next time – to raising questions.


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