At Wells Fargo, Bland Is Beautiful

8/24/2015


  Recent Price
$57
  Dividend
$1.50
  Yield
2.6%
  P/E Ratio
14
  Shares (millions)
5,221
  Long-Term Debt As % Of Capital
49%
  52-Week Price Range
$58.76 - $46.44

Earlier this year, Wells Fargo ($57; WFC) became the largest bank in the world by stock-market value. While you can't reach that size without delivering solid growth, sometimes the best growth strategies are those not pursued. In this case, Wells Fargo has elected to keep its trading business fairly small, minimizing the effects of tougher regulations and higher capital requirements besieging other banks. Most of its recent growth has sprung from the old-fashioned strategy of expanding its deposit base and loan portfolio.

An investment in Wells Fargo, the largest U.S. home lender, requires confidence that interest rates will rise and the U.S. economy will keep humming along. We see both developments likely playing out over the next two to four years. Wells Fargo is a Long-Term Buy.

Lending its way to the top

Wells Fargo's total loan portfolio climbed 7% year-over-year to $888.5 billion at the end of June, with commercial loans up 12% and consumer loans 3%.

Among the bank's commercial loans, real estate construction rose 8% and commercial and industrial 15%, partly helped by the acquisition of an $11.5 billion loan portfolio from GE Capital. Among consumer loans, first mortgages rose 7%, automobiles 7%, and credit cards 14%; that growth was partly offset by a 10% decline in second mortgages. Average deposits rose 8% in the June quarter.

Net interest income rose 2% in the first half of 2015, helped by a larger loan portfolio and lower expenses. Noninterest income held flat, as losses from trading and equity investments offset higher fees.

Wells Fargo holds a leading 14% share of the mortgage market, down from 30% in 2012, as nonbanks aggressively encroach on its turf. Mortgage-banking fees climbed 1% in the first half of year from the same period in 2014 but are down 27% from the first half of 2010. Over the past five years, Wells Fargo has offset that weakness by collecting more fees for trusts and investments, up 36% since 2010.

Like many banks, Wells Fargo's net interest margin has steadily declined over the past six years. Higher interest rates should improve lending profitability if the bank can raise rates earned on its loans and investments at a faster pace than the rates it pays on deposits.

Conclusion

The consensus calls for per-share profits to rise 3% in the September quarter and 4% in the December quarter on 3% revenue growth in both periods. If the environment for business lending and home mortgages remains favorable, Wells Fargo seems well-positioned to top expectations.

The stock yields 2.6%, highest among S&P 500 diversified banks and well above the 1.8% average for S&P 500 financials. Over the past three years, Wells Fargo has grown its quarterly dividend at an annualized rate of 28%, ahead of its sector average of 22%.

At 14 times trailing earnings, the stock trades slightly below its 10-year average and the average for S&P 500 diversified banks. 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
Jun '15
1.03
vs.
1.01
1%
58.26
-
53.56
14 - 13
Mar '15
1.04
vs.
1.05
3%
56.29
-
50.42
14 - 12
Dec '14
1.02
vs.
1.00
3%
55.94
-
46.44
14 - 11
Sep '14
1.02
vs.
0.99
3%
53.80
-
49.47
13 - 12
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
88.37
4.10
1.35
55.94
-
44.17
14 - 11
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
81
60
67
72
86
56
68

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


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