Wells Pushes Ahead On Mortgage Track

11/11/2013


  Recent Price
$43
  Dividend
$1.20
  Yield
2.8%
  P/E Ratio
11
  Shares (millions)
5,382
  52-Week Price Range
$44.78 - $31.25

Wells Fargo ($43; WFC), the largest U.S. home lender, has hitched its wagon to mortgages to drive growth in recent years. Today, mortgages drag on the bank's operating momentum, with applications slumping 54% and originations down 42% year-over-year in the September quarter.

However, the medium-term outlook for housing remains favorable, and the bank's diversification should help cushion the bumpy transition to higher interest rates.  Management has ramped efforts to cross-sell loans and brokerage or retirement services at its more than 9,000 bank branches. The goal is to forge tighter bonds with customers and boost retention, creating a "sticky" ecosystem of products and services.

Revenue has declined in three straight quarters, a trend that could continue through at least the March 2014 quarter. However, the bank has aggressively slashed costs in its mortgage business, and improving credit trends should allow Wells Fargo to keep releasing loan-loss reserves, juicing profit growth.

Consensus estimates project per-share profits will rise 7% in the December quarter and 4% in 2014. Wells Fargo trades at less than 11 times projected 2014 earnings — lower than all but 15% of stocks in our research universe and 32% below the median for financial stocks in the S&P 1500 Index. Wells Fargo, scoring above 95 for both sector-specific Quadrix ranks, is a Focus List Buy and a Long-Term Buy.

Roadblocks left to hurdle 

In the eyes of investors, legal headaches continue to trump operating results for many of the big U.S. banks. But Wells Fargo appears to be pulling clear of the overhanging problems. It reportedly agreed to pay less than $1 billion last month to settle claims brought by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. Even in concert with previous settlements, Wells Fargo's tab seems small in comparison to J.P. Morgan Chase's ($52; JPM) agreement to pay $5.1 billion for a similar pact.

Thirty U.S. banks will face another round of stress tests in 2014 to measure whether they can survive another financial disaster. The Federal Reserve has also proposed excluding municipal bonds from the list of assets that banks can consider easy to sell in case of a credit squeeze.

The central bank could begin phasing in the new rule in 2015, which could put pressure on the prices of muni bonds. Wells Fargo has raised its holdings in municipal debt by nearly 150% to $43 billion in the past three years.

Giving back to shareholders

Wells Fargo says it plans to seek authorization for a higher dividend and more share repurchases when it submits its capital plan to the Federal Reserve in January. With a pair of dividend hikes in 2013, Wells Fargo has grown its payout at an annualized rate of 75% over the past three years, versus 16% for the median financial stock in the S&P 500. Wells Fargo's 2.8% yield exceeds its peer-group median of 2.0%.

An annual report for Wells Fargo & Co. is available at 420 Montgomery St., San Francisco, CA 94163; (866) 249-3302; www.wellsfargo.com.

WELLS FARGO
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '13
0.99
vs.
0.88
-4%
44.78
-
40.79
12 - 11
Jun '13
0.98
vs.
0.82
-1%
41.74
-
36.19
12 - 10
Mar '13
0.92
vs.
0.75
-3%
38.20
-
34.43
11 - 10
Dec '12
0.91
vs.
0.73
6%
36.34
-
31.25
11 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
91.25
3.36
0.88
36.60
-
27.94
11 - 8
2011
87.44
2.82
0.48
34.25
-
22.58
12 - 8
2010
93.25
2.21
0.20
34.25
-
23.02
15 - 10
2009
98.64
1.75
0.49
31.53
-
7.80
18 - 4
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
68
91
72
81
78
45

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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