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Summary

  • The stock is inexpensively valued on 2015 earnings, in my opinion.
  • The stock has a high dividend yield of 2.86%, which I believe to be pretty safe.
  • The company is set to report 2Q14 earnings the morning of 11th July, '14.

The last time I wrote about Wells Fargo & Co. (NYSE:WFC), I stated, "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." Since writing the article, the stock has increased 5.39%, versus the 4.38% gain the S&P 500 (NYSEARCA:SPY) posted. It's safe to say that I scored a victory since that purchase. 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 24.2% excluding dividends (up 26.96% including dividends), and is beating the S&P 500, which has gained 20.32% in the same time frame. Since initiating my position back on May 21, 2013, I'm up 17.47% inclusive of reinvested dividends and dollar cost averaging. 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 right now is a good time to purchase more of the stock for the financial industry of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 13, 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 12.18 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.29 per share, and I'd consider the stock inexpensive until about $64. The 1-year PEG ratio (2.95), 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 4.41%. 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

08Jul14

52.25

13.00

12.18

4.29

64

2.95

4.41

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 2.68% 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 2.68% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 4 years. 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

08Jul14

2.68

35

1.4

14.1

9.8

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock hovering in middle-ground territory with a current value of 53.36. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line, with the divergence bars decreasing in height, indicating bearish momentum. As for the stock price itself ($52.25), I'm looking at $53.49 to act as resistance and $51.19 to act as support, for a risk/reward ratio which plays out to be -2.02% to 2.37%.

Upcoming Earnings Report

JPMorgan (NYSE:JPM) used to be the big bank that kicked off financial earnings, but it's now conceded to Wells by reporting a week later. Wells is set to report the morning of 11th July, '14. Of the 29 analysts covering the company, the mean estimate for the quarter is $1.01, with a high of $1.06 and low of $0.93. Last year's second-quarter earnings were $0.98, so analysts are expecting a 3% increase. Revenue estimates are coming in at $20.81 billion, with a low estimate of $20.33 billion and high estimate of $22.74 billion. The company has surprised on earnings four times out of four in the past year, with a minimum beat of 2% and maximum beat of 8.2%. I actually believe that the company can beat the estimates again this quarter, but I wouldn't be surprised if we see the stock pull back.

Conclusion

I believe Wells has definitely wrestled the top-dog honors away from JPMorgan in terms of operations. Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates but expensive on earnings growth expectations, while 2015 earnings estimates have been increasing since April. Financially, the dividend is high and I'm definitely comfortable hiding out in the name with that yield. On a technical basis, the stock has been losing a bit of momentum and the risk/reward is about equal. I like the stock but won't be buying any of it this week, and will choose to wait until I see it report. If the stock drops on earnings but estimates are beaten, I'll definitely pounce on it.

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: The author is long WFC, JPM, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: High-Yielding Wells Fargo Reports Soon, And I'm Cautiously Waiting