During the first half of 2018, we opportunistically added to Wells Fargo (NYSE:WFC) (down 7%), which was weak among bank stocks and detracted from performance. In February, Wells Fargo entered into a consent agreement with the Federal Reserve (Fed) that, among other things, placed restrictions on the bank’s asset growth (capped at $1.952 trillion). This regulatory agreement stemmed from Wells Fargo’s previously disclosed improper sales practices.
Since 2016, Wells Fargo has made substantial progress improving its governance, compliance controls, and operational risk management. Notably, the leadership and composition of the company’s board has improved, including the election of six new independent directors in 2017. Management has affirmed its commitment to have third parties conduct an initial risk management review by the end of 2018. The company has settled with regulators regarding its auto insurance and mortgage sales practices and has also resolved class-action lawsuits with shareholders and consumers. Furthermore, Wells Fargo passed the Fed’s annual industry stress test in June and received approval to use $32.9 billion for dividends and share buybacks over the next 12 months, representing a significant return of capital to shareholders.
After a comprehensive review, we believe Wells Fargo’s superior franchise, deep management team, track record of generating higher returns than other banks, and attractive valuation at 1.5 times book value make it a compelling long-term investment opportunity. On June 30, Wells Fargo was the Fund’s largest holding (a 3.9% position).
From Dodge & Cox's Stock Fund second quarter 2018 shareholder letter.
