Why Investors Should Still Consider Wells Fargo & Co
WFC Stock Offers Both Value and Growth
In today’s stock market, investors typically have to choose between value stocks and growth stocks. So when there is something that can offer both growth potential and good value, it deserves investors’ attention. I’m looking at Wells Fargo & Co (NYSE:WFC) stock.
On the value front, things are quite obvious. Despite the surge in Wells Fargo stock after the surprise victory of Donald Trump in the election, it’s not really expensive. Trading at $55.63 apiece, WFC stock has a price-to-earnings (P/E) multiple of just 14.12 times, which is lower than the industry’s average P/E of 15.39 times. Moreover, its price-to-sales and price-to-book ratios are also lower than the industry averages. (Source: “Wells Fargo & Co (WFC.N),” Reuters, last accessed February 8, 2017.)
When it comes to growth, it’s important to note how Wells Fargo makes money. As the third-largest bank in the U.S. with $1.9 trillion in assets, Wells Fargo offers a variety of services. But its key to making money has been the same as almost every other bank: by lending money at a higher rate of interest than it borrows it at.
The first source of growth for WFC stock comes from the bank’s growing portfolio of loans and deposits. In the fourth quarter of 2016, Wells Fargo had total average loans of $964.1 billion, up six percent year-over-year. The bank’s total average deposits also grew six percent year-over-year to $1.3 trillion. Everything else equal, a larger portfolio of loans and deposits can translate to higher interest income for Wells Fargo in the future.
Secondly, interest rates are rising. The U.S. Federal Reserve raised its benchmark interest rates last December and was projecting as many as three rate hikes in 2017. Higher interest rates would increase the net interest spread that is crucial to a bank’s profit margin. Therefore, if interest rates keep rising, Wells Fargo could see its profitability improve.
Furthermore, the overall economy is growing. If the U.S. government adopts more pro-business policies, we could see more economic activities. And a booming economy is usually associated with higher demand for consumer and business loans and a decline in nonperforming assets, all of which could be catalysts for Wells Fargo.
Of course, when investors are considering Wells Fargo stock these days, they probably still remember the bank’s fake accounts scandal last summer. It was reported that Wells Fargo’s employees opened sham credit cards, debit cards, and other accounts to meet aggressive sales targets. As a result, the bank agreed to pay a record fine of $185.0 million to regulators and WFC stock plunged.
That scandal badly hurt the bank’s investor appeal. But should it prevent investors from considering WFC stock today? Well, why don’t we take a look at what legendary investor Warren Buffett said on this matter.
WFC stock is the second-largest holding in Buffett’s Berkshire Hathaway Inc.’s (NYSE:BRK.B) portfolio. When asked about the bank’s scandal in November of last year, Buffett said that Wells Fargo made a “terrible mistake.” However, he added that he continued to have faith in the company as an “incredible institution” and Berkshire did not sell a single share of WFC stock after the scandal. (Source: “Warren Buffett hasn’t sold a single share of Wells Fargo following scandal,” CNN, November 11, 2016.)
The Bottom Line on WFC Stock
At the end of the day, don’t forget that you don’t need WFC stock to regain its appeal to make a return. Wells Fargo has already established its position in an extremely lucrative business and is returning some of its profits to investors as dividends. Right now, it pays $0.38 per share on a quarterly basis, translating to an annual dividend yield of 2.73%.
With value, growth, and dividends, WFC stock is still a solid pick for income investors.