Buy Your Ticket For Wells Fargo Wagon

5/19/2014


  Recent Price
$50
  Dividend
$1.40
  Yield
2.8%
  P/E Ratio
12
  Shares (millions)
5,353
  52-Week Price Range
$50.49 - $38.21

Wells Fargo ($50; WFC) skirted the worst of the financial meltdown and is outperforming during another difficult period for banks.

Stocks in the S&P 500 Index financial sector show an average total return of 4% so far this year. Regional banks are up 3% while diversified banks average a loss of 1%. The best-performing diversified bank this year, Wells Fargo has returned 11%. The stock, yielding 2.8%, is a Focus List Buy and a Long-Term Buy.

The leader of the banks

Wells Fargo's limited exposure to trading is proving to be an asset. Light volumes and low volatility for both bonds and stocks diminishes banks' ability to generate trading revenue. Trading activities generated less than 5% of Wells Fargo's revenue in the March quarter.

In the face of stalled sales growth, banks have preserved profit gains by slashing costs and releasing loan-loss reserves. But they could run out of levers to pull before operational momentum picks up again. Not helping matters, interest rates remain stubbornly low, adding strain to net interest margins, a key profitability measure for banks.

Wells Fargo has not emerged completely unscathed from the challenging environment. Its sales have declined in five straight quarters, in large part due to the sluggish residential-mortgage business. Smaller rivals have nibbled away at Wells Fargo's leading share of the U.S. mortgage market, currently 19% compared to 30% in 2012, according to Inside Mortgage Finance. The bank said residential-mortgage originations for the March quarter plunged 67% from the year-earlier period. But the mortgage pipeline posted its first sequential gain since the June 2012 quarter, offering hope that the home-mortgage business may be stabilizing.

Elsewhere, Wells Fargo's operations are improving. Growth of deposits and commercial loans remains solid. Operating profit margins, up in five straight years, expanded again in the March quarter, while returns on assets and equity keep churning higher. Finally, Wells Fargo continues to mostly steer clear of new legal potholes, lowering its loss reserve for potential lawsuits by $40 million to $911 million at the end of March, equating to 1.1% of annual revenue.

Wells Fargo is expected to grow per-share profits 5% this year, in line with the average for the S&P 500 financial sector. But analyst estimates for Wells Fargo have trended higher, while financials have averaged 1% deterioration over the last 90 days.

Conclusion

Wells Fargo earns an attractive Quadrix® Value score of 81. At 12 times trailing earnings, the stock trades 14% below its five-year average, 27% below the average for S&P 500 financials, and 20% below the average for banks. Wells Fargo's dividend has risen sevenfold since early 2011, with the most recent payment of $0.35 per share a new record high, topping levels seen in early 2009, before an 85% cut spurred by the financial crisis. History suggests the bank will keep growing the dividend over time.

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
Mar '14
1.05
vs.
0.92
-4%
49.97
-
44.17
13 - 11
Dec '13
1.00
vs.
0.91
-6%
45.64
-
40.07
12 - 11
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
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
88.07
3.89
1.15
45.64
-
34.43
12 - 9
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
50
81
78
95
65
85

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


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