Wells Fargo Is A High-Quality Dividend Company

May. 5.14 | About: Wells Fargo (WFC)

Summary

The stock is inexpensive on 2015 earnings estimates.

This weekend a friend asked me to recommend a stock and I told her Wells Fargo is a good one.

The dividend was increased 17% and has an ex-date of 07May14.

The last time I wrote about Wells Fargo & Co. (NYSE:WFC), I stated:

"Due to the low dividend yield, bearish technicals, and high valuation based on earnings growth potential I will not be pulling the trigger on this name right now."

Since the time the article was published, the stock did drop 0.36% versus the 0.52% drop the S&P 500 (NYSEARCA:SPY) posted. Wells Fargo is a bank holding company which operates in three segments: Community Banking, Wholesale Banking and Wealth, Brokerage and Retirement.

On April 11, 2014, the company reported first quarter earnings of $1.05 per share, which beat the consensus of analysts' estimates by $0.08. In the past year, the company's stock is up 31.37%, excluding dividends (up 34.21% including dividends), and is beating the S&P 500, which has gained 16.51% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the financial sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 12.33, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 11.61 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.27 per share and I'd consider the stock inexpensive until about $64. The 1-year PEG ratio (2.71), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 4.55%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

08Aug13

43.27

11.73

10.76

4.02

60

2.53

4.63

06Nov13

42.44

11.17

10.59

4.01

60

3.06

3.65

02Apr14

49.76

12.79

11.67

4.26

64

2.28

5.60

04May14

49.58

12.33

11.61

4.27

64

2.71

4.55

Click to enlarge

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.82% with a payout ratio of 35% of trailing 12-month earnings while sporting return on assets, equity and investment values of 1.4%, 14.1% and 9.8%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.82% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

08Aug13

2.77

26

1.4

13.6

9.9

06Nov13

2.83

32

1.4

13.8

9.9

02Apr14

2.41

31

1.4

13.9

9.8

04May14

2.82

35

1.4

14.1

9.8

Click to enlarge

Technicals

Click to enlarge

Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 58.53. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars increasing in height, indicating bullish momentum. As for the stock price itself ($49.58), I'm looking at $51.18 to act as resistance and $48.95 to act as support for a risk/reward ratio which plays out to be -1.27% to 3.23%.

Recent News

  1. The company declared a $0.35 quarterly dividend. The dividend has an ex-date of 07May14 with pay date of 01Jun14 and forward yield of 2.83%.
  2. BMO Capital upgraded the company to an "Outperform" rating.
  3. Bank of New York Mellon is reportedly selling their corporate trust unit with Wells Fargo being a prime candidate for the unit. Wells Fargo is a prime candidate for this sale because they are looking to build their own trust business at the bank.

Conclusion

With the bank up 9.21% on the year versus the 1.77% gain the S&P500 has posted thus far, the trend has to be your friend with the stock. Fundamentally the company is indeed undervalued based on future earnings estimates but expensive based on next year's earnings growth potential. Financially, the dividend is large and secure. On a technical basis I believe the stock may be coming on an uptrend. Due to the bullish technicals, secure dividend yield, and inexpensive valuation based on 2015 earnings estimates, I will be pulling the trigger here right now on a small batch.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long WFC, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.