A 10 year data analysis of Wells Fargo's (NYSE:WFC) stock shows that the stock's price and Earnings per Share of the company have a negative correlation. In a similar analysis, I found that the Wells Fargo's Earnings per Share and the dividend given by the company are also negatively correlated. A negative correlation implies that if one parameter increases, the other parameter decreases. In this regard, it means that if the EPS of the company is increasing, it is very likely that company may decrease its dividend payout or/and share prices may reduced.
Now, our investment thesis for Wells Fargo hinges upon two things:
1) What type of stock is Wells Fargo - Fundamental or Growth stock?
Fundamental stocks are those stocks that are stable in nature and give returns in the form of a dividend, while growth stocks are those that are volatile in nature, and the growth gets reflected in share prices rather than the dividend payout. Generally, a company's stock in its nascent stage tends to possess growth character, and in a maturing phase, the company's stock possesses a fundamental character.
2) What is the future projection of the earning per share of the company and the revenue of the company?
To answer the first question, looking at the history of the stock, it is more than 150 years old. This clearly indicates that the stock is not in its initial growing phase. Therefore, we can assume that the company is in its maturity phase, if not in decline phase. To support the assumption, we have to analyze the price movement of the Wells Fargo stock. Data reflects that for the previous 5 years, this stock has been very range-bound in its movement, which means that the upper limit and the lower limit of the stock have been very much defined, and the stock tends to move within this range. In this case, upper limit or resistance lies around $35 and lower limit or support is around $25.
The above argument supports our assumption of the stock being fundamental in nature.
What is the implication of this conclusion?
The findings imply that the return an investor gets after investing in the Wells Fargo stock is from the dividend payment and not from the share price movement. Therefore, investors should be more concerned about the dividend payout history of the company.
Now to answer the second question, one should look into the growth rate of the earnings year on year. Our analysis shows that the Compounded Annual Growth Rate of revenue of the company in last 10 years is around 1-1.2%, while for the last three years it has been around -1%.
Latter data implies that we can expect dividend payment to increase by 0.4-0.5% (as the correlation is -0.44) in the coming years and overall, the stock's return will be based on the dividend payments done by the company.
Some Last Words:
Wells Fargo is a fundamental stock. The price movement is very much range-bound; $25 level makes a good entry point and $35 level makes an exit level. Dividend payout has been the major source of return, and the company has shown stable growth in dividend payment. So overall, risk-averse investors should invest and investment horizon is medium to long term.
Their risk-based capital has been constant with 13.26, 15.07 and 14.6 in the previous three years. Return on Assets has also been range-bound with 0.9, 1.01 and 1.2 in the same period.