Wells Fargo: Banking Stock Of Impressive Longevity

The US bank earnings season kicked off last week. We thought it is a good opportunity to make a bank the focus of our latest article. How about Wells Fargo & Co (NYSE: WFC)? It was one of the first industry majors to report quarterly results on Friday. Analysts described the set of second-quarter figures as a mixed bag of goods. Profits topped expectations, but revenues disappointed. In addition, the persistently high level of costs remains a concern.

That said, our focus is on dividend investing. We’ll take a look at Wells Fargo as a stock with potential benefits or pitfalls for income investors.

The history and business of Wells Fargo

Wells Fargo
Wells Fargo

With assets of $1.9 trillion, Wells Fargo now ranks third among US banks by that metric. According to Forbes, it was the seventh biggest publicly traded enterprise in 2016. Fortune placed Wells Fargo at number 27 last year among US corporations in terms of revenue. The company currently has a market capitalization of $271.8 billion.

This banking behemoth began in 1852. Henry Wells and William Fargo launched a company to provide financial and express services to pioneers in the American West.

Through the years, Wells Fargo has grown into a diversified financial services group. It now offers banking, insurance, investments, mortgage, and consumer and commercial financial services. The company operates through more than 8,600 locations and about 273,000 employees across 42 countries.

Wells Fargo is headquartered in San Francisco.

Latest results

Wells Fargo described its second-quarter results as “strong” but Wall Street wasn’t impressed with them. At $22.2 billion, revenues were unchanged from the same quarter of 2016. They fell below average estimates of about $22.5 billion as the mortgages and wholesale banking segments experienced weakness. However, loan growth and higher interest rates helped quarterly earnings increase by 4.5%. Diluted earnings per share rose by 6% to $1.07, topping expectations for $1.01. Net interest income was 6.4% higher at $12.5 billion.

At the conference call that followed the report, analysts expressed concerns over the company’s costs. While Wells Fargo managed to trim expenses, the numbers remained below its targeted range. The bank was a constant presence in headlines last year due to a scandal revolving around improper sales practices. It emerged that Wells Fargo has created more than two million accounts without obtaining permission from the customers whose names featured on those accounts. The scandal led to extra costs of $110 million during the quarter, which the company spent on third-party services. Wells Fargo also had to make additional provisions for legal expenses, some of them related to its residential mortgage-backed securities business.

Dividends

As was the case with most banks, the financial crisis forced Wells Fargo to cut its dividend. However, the company has grown its annual payout since 2012. The current yield is 2.76%.

In its latest report, Wells Fargo said it expected to pay a third-quarter dividend of $0.39 per share. This compares to $0.38 in the second quarter.

The increase is certainly very modest but another piece of news may have gladdened investors. Wells Fargo said the Federal Reserve had no objections to its capital plan. Under that plan, the bank intends to spend as much as $11.5 billion on stock repurchases through to the second quarter of 2018.

Valuation

In the wake of financial crisis, banking stocks were the market pariahs. The industry is not yet fully back in investors’ good graces. However, a strong economy and the return to interest rate increases have helped win back some of the trust.

In the case of Wells Fargo, the reputational damage from the fake accounts scandal may continue to be a drag. On the other hand, this remains a solidly profitable bank. Some analysts even consider it the best stock among the US banking majors.

Over the past year, Wells Fargo has traded in the range of $43.55 to $59.99. The shares closed last week a cent short of $55. That’s not a particularly attractive price. However, the forward P/E ratio is 13.2 against an industry median of 16.  In addition, Wells Fargo currently offers the highest dividend yield among the big US banks.

Disclosure:

I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.

This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.

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