Barron’s: Wells Fargo Looks Cheap

In this weekend’s Barron’s, Wells Fargo (WFC) is highlighted as a good buy right now:

Wells Fargo, in particular, is looking like a bargain now. The stock (WFC) has fallen 12% in the past month to a recent $51 versus an 8% drop for the S&P 500; it now offers a 3% dividend yield. It trades at 11.2 times next year’s expected earnings and is in a strong position to benefit from the growing U.S. economy and the improving housing market.

Wells Fargo could reach $63.56 if it traded at 14 times expected 2016 earnings, where some high-quality regional banks are currently trading. The bank has raised its dividend with the Fed’s blessing every year since 2010, and investors expect more of the same in the years ahead.

“We’re almost assured of continued dividend growth,” says longtime holder Hank Smith, chief investment officer at Haverford Trust. “They should be giving shareholders low-double-digit dividend growth over the next three to five years.”

Few companies have the kind of low-cost and low-risk funding stream of Wells Fargo, which can fund its entire loan book and then some with its $1.2 trillion worth of deposits, which cost the bank only eight cents for every $100 as of the end of the second quarter. Meanwhile, the bank’s $889 billion in loans yield an average of 4.2%.

The company generates about 55% of its income from its community banking division, serving households and small businesses; about 35% is a product of its wholesale banking unit, which mostly serves corporations and governments; and the bulk of the rest comes from its wealth management and brokerage businesses.

Wells Fargo doesn’t have large investment banking and trading desks like its peers which may hold down earnings growth in exuberant times but also gives the bank some unique advantages.

The simplicity of the bank’s business model is increasingly a benefit in an era of greater regulation, says Jason Clark, a portfolio manager at AFAM Capital, which holds the stock in client accounts. “Given all the oversight, it’s probably good that they’re not heavily dependent on investment banking,” he says.

Posted by on September 5th, 2015 at 2:09 pm


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