Wells Fargo & Company (NYSE:WFC) stock is an excellent combination of value and dividend growth stock. Although WFC's stock has significantly outperformed the market since the beginning of 2012, with a gain of 82%, in my opinion, it still has plenty of room to move up. Wells Fargo has good valuation metrics and strong earnings growth prospects. Wells Fargo was the most profitable U.S. bank in 2013, and its ttm profit margin of 46.20% is extremely superior to the other major U.S. banks. Furthermore, WFC's stock is ranked third among all S&P 500 stocks yielding more than 2%, according to Portfolio123's "All-Stars: Graham" powerful ranking system. In addition, the company continued to deliver large sums of cash back to shareholders by stock buyback and growing dividend payments.
Wells Fargo & Company is a diversified financial services company with operations around the world. The company provides retail, commercial, and corporate banking services to individuals, businesses, and institutions. The company was founded in 1852 and is headquartered in San Francisco, California.
The table below presents the valuation metrics of WFC, the data were taken from Yahoo Finance and finviz.com.
Wells Fargo's valuation metrics are good; the trailing P/E is low at 12.41, the forward P/E is also low at 11.66, and the PEG ratio is at 1.20.
Latest Quarter Results
On July 11, Wells Fargo reported its second-quarter 2014 financial results; EPS was in line with analysts' expectations, and revenues were better than Street's estimates.
The company reported net income of $5.7 billion, or $1.01 per diluted common share, for second quarter 2014, up from $5.5 billion, or $0.98 per share, for second quarter 2013. For the first six months of 2014, net income was $11.6 billion, or $2.06 per share, up from $10.7 billion, or $1.90 per share, for the same period in 2013.
Revenue was $21.1 billion, up from $20.6 billion in first quarter 2014, reflecting increases in both net interest income and non-interest income. Several businesses generated linked-quarter growth, including capital markets, corporate banking, commercial real estate, corporate trust, debit card, personal lines and loans, merchant services, and retail brokerage.
In the report, Chairman and CEO John Stumpf said:
Our strong results in the second quarter reflected the benefit of our diversified business model and our long-term focus on meeting the financial needs of our customers. By continuing to serve customers we grew loans, increased deposits and deepened our relationships. Our results also reflected strong credit quality driven by an improved economy, especially the housing market, and our continued risk discipline. We are committed to both maintaining strong capital levels and returning more capital to our shareholders. In the second quarter we increased our common stock dividend 17% and repurchased 39.4 million shares. We remain dedicated to building long-term shareholder value, and I am optimistic about the future as we continue to focus on meeting the needs of our consumer, small business and commercial customers.
Dividend and Share Repurchase
Wells Fargo had decreased its dividend payment in the years 2009, 2010, as a result, of the 2008-2009 global financial crisis, but had started to increase its dividend payment in 2011. In the second quarter, the company increased its quarterly common stock dividend to $0.35 per share from $0.30, or 17%.
The forward annual dividend yield is at 2.81%, and the payout ratio is only 30.3%. The annual rate of dividend growth over the past three years was very high at 79.2%.
Source: Charles Schwab
Since the company generates lots of cash, and the payout ratio is low, there is a good chance that the company will continue to raise its dividend payment.
In the first quarter, Wells Fargo's Board approved an additional 350 million shares in the company's authority to repurchase its common stock. During the second quarter, the company repurchased 39.4 million of its shares and entered into a forward repurchase transaction for an additional estimated 19.4 million shares.
Competitors and Group Comparison
A comparison of key fundamental data between Wells Fargo and its main competitors is shown in the table below.
Wells Fargo has the lowest debt-to-equity ratio among the stocks in the group. It has also the second lowest PEG ratio, and the second highest dividend yield.
Wells Fargo achieved better asset productivity and lower charge-offs than its competitors, as shown in the charts below.
Source: Wells Fargo 2014 Investor Day
Wells Fargo Margins' parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below.
According to Portfolio123's "All-Stars: Graham" powerful ranking system, WFC's stock is ranked third among all S&P 500 stocks that pay a dividend with more than 2% yield, only The PNC Financial Services Group, Inc. (NYSE:PNC) and JPMorgan Chase & Co. (NYSE:JPM) have a higher ranking. The "All-Stars: Graham" ranking system is based on investing principles of the well-known investor Ben Graham.
The ranking system is quite complex, and it is taking into account many factors like; trailing P/E ratio, price to book value, and EPS growth, as shown in the Portfolio123's chart below.
Back-testing over fifteen years has proved that this ranking system is very useful.
The charts below give some technical analysis information.
The WFC stock price is 1.63% below its 20-day simple moving average, 2.80% below its 50-day simple moving average, and 6.00% above its 200-day simple moving average. That indicates a short-term and a mid-term downtrend and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -0.42 and descending, which is a bearish signal (a rising MACD histogram that is crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 52.15, which do not indicate overbought or oversold conditions.
Many analysts are covering the stock, but their opinion is extremely divided. Among the thirty-two analysts, six rate it as a Strong Buy, seven rate it as a Buy, seventeen rate it as a Hold, one analyst rates it as an Underperform, and one rates it as a Sell.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering WFC stock there are only eight analysts who have the four or five star rating, six of them recommend the stock, and the other two top analysts rate it as a Hold.
According to Bloomberg's news-item of August 11, Wells Fargo is selling about $1.3 billion in troubled mortgage debt on behalf of regional bank clients. Wells Fargo is marketing two pools made up of mostly reperforming loans, as well as non-performing loans. The offering includes a pool of about $630 million in unpaid principal balance and another of about $700 million. This information came from two people with knowledge of the offering, who asked not to be identified because the sale is private. Wells Fargo declined to comment on the bank's offering. According to Bloomberg, sales of soured U.S. property loans are accelerating as increased demand from hedge funds and private-equity firms push up prices and financial regulations force banks to pledge more capital for some assets they hold.
Wells Fargo is continuing to decrease its non-performing assets which have decreased by $686 million from the last quarter to $18.1 billion. Non-accrual loans decreased $678 million to $14.0 billion; non-accrual loans were $15.7 billion at the end of 2013.
Despite Wells Fargo's strong share repurchase program, the company has succeeded to improve its healthy capital ratios. Wells Fargo's Tier 1 Common Ratio (Basel III) has improved from 8.54% in the second quarter of 2013 to 10.09% in the last quarter. The ratio is just above the firm's recently revised internal target of 10% (was 9% previously).
Sources: Company Reports
Although earnings were in line with analysts' expectations in the last quarter, Wells Fargo showed earnings surprise in each one of the previous three-quarters, as shown in the table below.
Since the company has succeeded to beat analysts' expectations in three of the last four quarters, there is a good chance, in my opinion, that Wells Fargo will continue to surprise by reporting better-than-estimated results also in the future.
WFC's stock started its rally at the end of 2011 and continued to performed very well year to date. Since the start of the year, WFC's stock has gained 9.9% while the S&P 500 index has risen 4.8%, and the Nasdaq Composite Index has increased 5.4%. Moreover, since the beginning of 2012, WFC's stock has gained 81.7%, while the S&P 500 index has increased 54.0%, and the Nasdaq Composite Index has risen 68.9%. Nevertheless, considering its good valuation metrics and strong earnings growth prospects, the stock, in my opinion, is not expensive.
Wells Fargo will continue to benefit from the improvement in the economy. Wells Fargo was the most profitable U.S. bank in 2013, and its ttm profit margin of 46.20% is extremely superior to the other major U.S. banks (BAC-13.1%, JPM-28.4% and C-14.5%).
Wells Fargo has good valuation metrics and strong earnings growth prospects; its forward P/E is low at 11.66, and its PEG ratio is also low at 1.20. Wells Fargo is generating much cash, and its ttm price to free cash flow of 7.61 is very low, and it returns value to its shareholders by stock buyback and increasing dividend payments. Moreover, WFC is ranked third among all S&P 500 stocks that pay a dividend with more than 2% yield, according to "All-Stars: Graham" powerful ranking system. All these factors bring me to the conclusion that WFC stock is a smart long-term investment. Furthermore, the rich growing dividend represents a gratifying income.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in WFC over the next 72 hours. 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.