Stock Buy - Wells Fargo Bank

| About: Wells Fargo (WFC)

I took action on one of the stocks listed on my April watch list. Just before Friday's market close I bought shares of Wells Fargo Bank (NYSE:WFC). If you're a regular follower of my blog, you already know that I've bought up banking and insurance stocks this year. I'm doing this because in today's market they offer the best discounts. This purchase of WFS is probably my last buy this year in this sector. I'll only add more shares, if these stocks continue to drop in price. I bought 80 shares of Wells Fargo Bank at $47.06 per share, for a total of $3,764.80. This new stock holding will increase my annual dividend income by $120 dollars.

Wells Fargo Bank has had it tough so far this year. WFC stock is down 13.41% YTD. This price drop has led to a better yield. WFC is currently yielding 3.19%, which is high for a U.S. bank. From an investor's perspective, WFC is arguably the best U.S. bank. WFC is also a darling stock of Warren Buffett. If it's good enough for the Oracle of Omaha, it's good enough for me.

Wells Fargo Bank Company Overview

Wells Fargo & Company is a financial services and bank holding company. The Company's segments are Community Banking, Wholesale Banking, and Wealth and Brokerage and Retirement. The Company's Community Banking segment offers a range of financial products and services for consumers and small businesses, including checking and savings accounts, credit and debit cards, and auto, student and small business lending. The Community Banking segment's products include investment, insurance and trust services, and mortgage and home equity loans. The Community Banking segment's products and business segments include middle market commercial banking, government and institutional banking, corporate banking and commercial real estate, among others. The Company's Wholesale Banking segment provides a range of financial solutions to businesses across the United States and around the world. The Wealth and Brokerage and Retirement segment provides a range of financial advisory services. Source: schwab.com

Wells Fargo Bank Dividend History

  • Annual Dividend Yield of 3.20%
  • Annual Dividend Rate (IAD) $1.50
  • Payout Ratio (TTM) of 35.59%
  • Dividend Coverage Ratio (TTM) of 280.95%
  • 3 Year Dividend Growth Rate of 18.8%
  • 5 Year Dividend Growth Rate of 49.1%
  • 10 Year Dividend Growth Rate of 4.0%

Wells Fargo's 5 and 10 year dividend growth rates have a large variance. This is due to the 2009 market collapse. When WFC recovered in 2011, its dividend increased by 140%, then 83% in 2012. These two large increase have skewed the numbers. I'm focused on the 3-year dividend growth rate of 18.8%. I'm hopeful that this is a good guesstimate of future annual dividend increases.

Click to enlargeSource: www.schwab.com

The chart below compares Wells Fargo Bank to other large U.S. Banks. They all show unusually high dividend growth rates. Think 2009; it led to massive dividend cuts, followed by above average increases. Looking at the chart holistically, WFC has paid had the best overall dividend increases. This is my opinion, but I put much more weight on recency. WFC has an 3-year CAGR of 18.8%. The 3-year CAGR of Bank of America (NYSE:BAC) and Citigroup (NYSE:C) look better on paper. This is because these two banks took longer to recover and delayed their big dividend increases. Whereas JPMorgan Chase (NYSE:JPM) and Wells Fargo Bank increased their dividends a few years earlier.

Click to enlargeSource: www.schwab.com

Wells Fargo Bank Stock Valuation

  • S&P Capital IQ ranks Wells Fargo Bank 4-stars, with a 12-month price target of $57.00 and a current fair value of $53.20.
  • Morningstar ranks Wells Fargo Bank 4-stars, with a fair value calculation of $61.00.

The F.A.S.T Graph below shows that Wells Fargo Bank is below the orange and blue lines. For those of you unfamiliar with this tool, when the black line falls below the orange line this indicates a stock is trading below the market average P/E Ratio of 15. If the black line falls below the blue line this indicates a stock is undervalued and is trading below its normal P/E Ratio. Per the graph, over the past 20-years, WFC has traded at an average P/E of 16.5. Today WFC stock is trading at a 11.3 P/E Ratio. Based on the graph below WFC is undervalued and in my buy zone.

Click to enlargeSource: Fastgraphs.com

Wells Fargo Bank Takeaways

Wells Fargo Bank is the only U.S. bank stock that I own. This latest buy takes my total WFC share total to 105. My per share cost basis is $48.46. I'm interested in owning JPM and U.S. Bancorp (USB) as well. But as mentioned earlier, I'll likely hold off on buying new banking shares because my portfolio allocation of financial stocks is already high. Having said that, If Wells Fargo Bank dips again I may add more shares.

Disclosure: The author is long Wells Fargo