Mortgages Pull Load At Wells Fargo

6/4/2012


  Recent Price
$32
  Dividend
$0.88
  Yield
2.8%
  P/E Ratio
11
  Shares (millions)
5,338
  52-Week Price Range
$34.59 - $22.58

With residue from the mortgage mess still weighing on the financial sector, big U.S. banks keep finding imaginative ways to wreak havoc on themselves and their shareholders. None is bigger than Wells Fargo ($32; WFC), with a stock-market value of more than $172 billion, but the bank has managed to skirt the worst of the sector's troubles.

Operations at big banks can be opaque, but of the more than 450 U.S. banks or brokerages in our research universe, none can equal Wells Fargo's A+ credit rating. In addition, the company's Quadrix® Overall score of 93 and high and rising return on equity bespeak a level of quality few other banks match. With an improving outlook and attractive valuation, Wells Fargo is a Long-Term Buy.

Business breakdown

Wells Fargo separates its business into three segments. Community banking (roughly 60% of sales, 52% of net income) sells products such as mortgage and home-equity loans in all 50 states. The wholesale-banking business (26%, 40%) offers commercial- and investment-banking services to large corporate customers. Lastly, the wealth, brokerage, and retirement unit (14%, 7%) provides brokerage and financial-advisory services.

The mortgage business grew when Wells Fargo bought troubled Wachovia for about $12.7 billion in December 2008. At the time, Wachovia was loaded with toxic investments, which led to massive write-downs. But the worst seems to have passed.

Wells Fargo's allowance for loan losses is $18.9 billion, down 25% from its peak in March 2010. The bank continues to scale back on loss provisions, which should help sustain profit growth for the rest of the year.

Passing the Federal Reserve's stress test in March, Wells Fargo raised its quarterly dividend 83% to $0.22 per share. The bank had paid $0.34 per share quarterly before a cut to $0.05 in 2009. The indicated dividend represents about 30% of trailing 12-month earnings, well below the 10-year average of 46%, and we expect Wells Fargo to continue growing its payout.

Revenue from banking fees is under pressure, hampered by new regulations and public criticism. But mortgage-loan growth should more than offset lower fees from credit and debit cards. Mortgage banking is experiencing strong volumes and profit margins. Net interest margin — the spread between the interest Wells Fargo pays on deposits and what it receives on loans — is rising.

Sales increased 4% in the March quarter, the first growth since the December 2009 quarter. And the bank's return on equity has reached the highest level since 2008.

Conclusion

Shares are up 17% this year. Yet the stock trades at just 11 times trailing earnings, discounted 32% from its five-year average and 28% from the current sector median.

The profit consensus is drifting higher, now calling for 2012 earnings per share of $3.27, implying 16% growth. At less than 10 times estimated 2012 earnings, the stock trades 28% below the sector median.

An annual report for Wells Fargo & Co. is available at 420 Montgomery St., San Francisco, CA 94104; (866) 249-3302; www.wellsfargo.com.

WELLS FARGO
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '12
0.75
vs.
0.67
+ 4%
34.59
-
27.94
12 - 10
Dec '11
0.73
vs.
0.61
- 6%
27.97
-
22.61
10 - 8
Sep '11
0.72
vs.
0.60
- 7%
29.63
-
22.58
11 - 9
Jun '11
0.70
vs.
0.55
- 6%
32.63
-
25.26
13 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
87.44
2.90
0.48
34.25
-
22.58
12 - 8
2010
93.25
2.43
0.20
34.25
-
23.02
14 - 9
2009
98.64
0.90
0.49
31.53
-
7.80
35 - 9
2008
51.65
1.00
1.30
44.69
-
19.89
45 - 20
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
93
70
81
52
71
90
84

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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