Free 7-day Trial
All Articles and Columns »

Wells Fargo Is a Buy

January 26, 2013 | About:
insider

Gordon Pape

14 followers
We are adding Wells Fargo & Co. (WFC) to our Recommended List as the financial services representative on our Primary Core sub-list. Here's what you need to know. All dollar amounts are in U.S. currency. The business: Wells Fargo is one of the largest financial institutions in the U.S. with $1.4 trillion in assets. It was ranked No. 26 on Fortune's 2012 rankings of America's largest corporations.

The company traces its history back to the Old West. It was founded in 1852 and is now headquartered in San Francisco. Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 9,000 branches, 12,000 ATMs, and the Internet (wellsfargo.com). It has offices in more than 35 countries and more than 265,000 employees. The company claims that it serves one in three households in the United States.

Wells Fargo has approximately 5.3 billion shares outstanding.

Why we like it: Wells Fargo is one of the most solid financial institutions in the U.S. According to several accounts, it was the only major banking company to refuse government bail-out money during the crash of 2008-09 because its executives felt the payments were a subsidy to the bad management of others. Washington made them take the money anyway in the interests of having the industry present a united front. Wells Fargo repaid the $25 billion it received in December 2009.

One of the things the company did with the bail-out money was to buy the assets of ailing Wachovia for $12.7 billion in what has been described as a shotgun marriage orchestrated by the U.S. Treasury Department. As a result, WFC emerged as the second-largest bank in the States.

Today the company has one of the best debt ratings of any firm in the financial services field. Standard & Poor's rates it A+ for long-term issues, A-1 for short-term issues, A+ for senior unsecured notes, and A for subordinated notes.

The share performance has been choppy but the overall trend during the past year is up. The company recently announced a 14% dividend increase to $0.25 per quarter ($1 a year) to yield 2.8%.

Also good news for investors is the fact the company is actively buying back its own shares. Wells Fargo purchased 42 million shares of common stock in the fourth quarter of 2012 and an additional estimated six million shares through a forward repurchase transaction expected to settle in the first quarter of 2013

Financial highlights: The company reported year-end 2012 financial results on Jan. 11 and they were very impressive. Revenue was a record $86.1 billion, up 6% from 2011. Net income also set a new record at $18.9 billion ($3.36 a share), both up 19% from the year before. This means the company is trading at about 10.5 times trailing earnings. According to Yahoo! Finance, analysts expect earnings of $3.64 a share this year and $3.89 in 2014.

In terms of its capital position, the company said that Tier 1 common equity under Basel I increased $3.3 billion from the prior quarter to $109.1 billion. That brought the with Tier 1 common equity ratio to 10.12% under Basel I as of Dec. 31. The estimated Tier 1 common equity ratio under the current Basel III capital proposals is 8.18%.

Risks: There are still lawsuits arising out of the tainted mortgages scandal overhanging the industry and Wells Fargo is a party to some of them. It will probably take years for these to work their way through the legal system.

The entire U.S. banking system continues to be under a cloud and another credit crisis, while unlikely at this stage, would certainly hit the share price. Wells Fargo stock fell as low as $8.61 in March 2009 at the nadir of the market crash. Its highest point was $39.80 in September 2008, just before Lehman Brothers collapsed and the bottom fell out.

Dividends: As mentioned, the shares pay a quarterly dividend of $0.25 with the next payment due on March 1 to shareholders of record on Feb. 1.

Summing up: Wells Fargo becomes our Primary Core U.S. financial stock. Buy for long-term growth potential and some cash flow.

Action now: Buy. The shares closed on Friday at $35.14.

About the author:

Gordon Pape
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 2.9/5 (18 votes)

Comments

jeff.lawson2550
Jeff.lawson2550 - 1 year ago
Wells Fargo is one of the most solid financial institutions in the U.S. How? Why? This statement on its own without support has no meaning.

According to several accounts, it was the only major banking company to refuse government bail-out money during the crash of 2008-09. It is 2013, how is that relevant 5 years later? Investing is all about how the company will increase shareholder's value going forward.

The article also fails to talk about what makes Wells Fargo better than JP Morgan, Citi, Bank of America, etc. Also, nothing about what 2013 will bring for the US Economy and the banking/housing industries.

Long Wells Fargo, for reasons not mentioned in this article.

htyen1
Htyen1 - 1 year ago
i think wfc is one of the most solid, stable financial institution in the us

take a look at their varies metrics http://www.bankprobe.com/bank/WELLS_FARGO_and_COMPANY/h1120754

roe: 15%+

roa: 1.6%+

nim : 1.8%+

etc. these are all some of the best in the industry.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Hide