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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Wells Fargo Is a Great Bank in a Bad Industry

Wells is a banking powerhouse but powerless to stop the further commoditization of the industry

While Wells Fargo (NYSE:WFC) has lagged other big names like PNC, Capital One (NYSE:COF), JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC) in recent months, over the last 5 and 10 years, there hasn’t been a better performer in the group.

The problem is that banking is such a commoditized part of the world now that no banks have a real economic moat. Sure, Warren Buffett talks up Jamie Dimon at JPMorgan and has a ton of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) money with Wells Fargo, but no one bank has durable competitive advantages (from a business standpoint) over any other one. They all have the same basic offerings.

I say that because I do not get romantic about investments. I disagree with the concept of holding onto a stock forever just because it has done well for you. Now, if you own it at a cost basis of $1 and it is at $47, the tax implications may make it hard to sell  I get that.

At the same time, if you are earning a great dividend payment at a virtually zero cost basis, it may make better business sense not to sell.

But if you owned Wells Fargo 10 years ago and did not buy Apple or Google because they were too high-tech, you may never outpace the market going forward. While the criteria of analysis may not change, actually evaluating business models, assets and entire companies will continue change. What was a good brand back 20-30 years ago does not make it a good brand today. Just because you want things to stay the same does not mean they do.

As for Wells Fargo, it has done a great job squeezing more and more profit out of its stagnant revenue. The company has not been able to grow sales at all since taking over Wachovia in 2008 despite earning more than $22 billion last year.

Key statistics from the last decade at Wells Fargo

  • $35 billion to $87 billion in revenue.
  • $8 billion to $22 billion in net income.
  • $146 billion in total income.
  • 154% growth in book value.
  • $9.42 in total dividends.

In fact, looking into the bank’s largest shareholder, Berkshire Hathaway, you get a picture of the confidence that big money investors like Warren Buffett (Trades, Portfolio) have in Wells Fargo. Since the housing bubble in 2008, Berkshire has bought close to 200 million shares more of the stock at prices ranging from $14.24 to $56.24. Chances are good the position will only get larger in the future.

Yet he doesn’t have many other choices to put Berkshire money. Most investors have better alternatives.

Right now Wells Fargo is off 11% on the year, trading at approximately 12 times earnings and throwing off 3% a year in dividends. Buffett’s last reported price was $48.34 so if you want to get in at the same price, now is the time to do it.

The chances that WFC will outpace the S&P 500 in the next 10 years, however, is low in my estimates. Since 2009, the index has trounced the bank’s returns handily  130% to 60%, while providing an equally solid dividend payment. At this point, even if we let the analysts imagine the bank having a wide moat (I disagree) it will still be hard pressed to outpace the overall market simply based on its shear size.

In other words, only get involved if you want a slow-growth company that pays a solid dividend.

Disclosure: I do not have any positions (short/long) in Wells Fargo.

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website

Rating: 2.7/5 (3 votes)



Domi99domi - 2 years ago    Report SPAM

If valuation stays the same, i can easily imagine WFC paying me a 3,2% Dividendend per year and growing book value at about 5-7%, which translates into a return of about 8-10%.With a PE Ratio of 25, the S&P doesn't look very likely to outperform Wells.

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