With the downgrading of numerous large banking stocks over the past few months, many investors may shy away from these shares in their portfolio, fearing additional losses. Yet, there may be at least a few bright spots in this sector. In this article, I will discuss why I feel that Wells Fargo & Co. (WFC) may still be a smart investment in an otherwise shaky industry.
Just How Big is Big for a Bank?
Based on market cap alone, Wells Fargo holds the top spot for U.S. banks at just under $185 billion. It's shares currently offer a dividend yield of slightly more than 2.5%, and while that's not astronomical, considering some other large banks such as U.S. Bancorp (USB) and Citigroup (C) with each yielding below 1%, it could be somewhat enticing for some investors.
As a whole, throughout 2012, bank stocks have actually rallied quite a bit as far as share price goes, with the Nasdaq Bank Index rising 18% year to date. This even beats the overall 15.8% gain for the S&P 500 index for the year. And, if history repeats itself, these shares should continue to rise over the near term, given that in the four weeks leading up to every presidential election since 1992, bank stocks have outperformed the S&P 500.
Wells Fargo's earnings per share stand at just over 3, with a moderate P/E ratio of roughly 11.6. The company's shares are estimated to rise approximately 10% over the next 12 months, which, coupled with the company's dividend, can provide a nice return for investors.
One move that could make Wells Fargo shares even more attractive to investors is its potential purchase of CIT Group, Inc. This acquisition could provide Wells with approximately $35 billion in higher yielding assets that have already been marked-to-market through Fresh Start Accounting. In addition, given the amount of CIT's high cash balances, this move wouldn't cause Wells a material reduction in cash on hand.
There are a few points of caution, though, as the banking sector has proverbially had its hand slapped over certain issues of late. For instance, a number of big banks, including Wells Fargo, JPMorgan Chase (JPM), and Citigroup, have either resolved, or are in the process of resolving, issues such as wrongful overdraft fees that have been charged to their customers, which is actually a violation of the U.S. Federal Reserve's regulation of obtaining a customer's approval before charging any such fees on debit cards.
Yet, while these settlements may have a negative effect on these firms' financials, they may also help in restoring at least some customer confidence in these mammoth institutions.
How Other Institutions Stack Up
When it comes to comparable dividend yields, JPMorgan Chase comes in at 2.9%, with earnings per share of just over 4.3. The firm's market cap is a tad below Wells, standing at approximately $157 billion with consolidated assets of just over $2.13 billion - which still brings this institution in at second place, followed closely by Citigroup, with just over $2 billion in consolidated assets.
While Citigroup is comfortably in the top three in terms of size, it still hasn't kept this firm from being fined for various trading violations. For example, recently Citigroup agreed to pay over $500,000 in fines for accusations that the company exceeded speculative position limits in wheat future contracts via the Chicago Board of Trade. Apparently, the firm had violations on more than one occasion during the fourth quarter 2009. Yet, although this is a small red flag, the fine doesn't represent a huge loss to the firm that reported a cash flow in excess of $41 billion in 2011.
Aside from the big three U.S. banking institutions, investors may find value within the regional banking industry firms. For instance, U.S. Bancorp, the parent company of U.S. Bank, held over $350 billion in assets as of the end of 2012's second quarter. The firm also recently announced a quarterly dividend of $0.195 per common share that is payable to shareholders of record at the close of business on September 28, 2012.
Although U.S. Bancorp's market cap of under $65 billion pales in comparison to Wells Fargo and JPMorgan, the firm does offer a comparable dividend yield of 2.3% and earnings per share of close to 3.
Not All Big Banks Are Created Equal
One banking biggie that investors may wish to steer clear of, at least for now, is Bank of America (BAC). While this bank is working with its "Project New BAC" in taking on less risk and generating more revenue from its existing customers, its shares have taken a proverbial beating throughout the second and third quarters of 2012. Currently, the bank's return on equity of under 5%, along with its 14% operating margin and 11.6% profit margin, are the lowest among the big U.S. banks.
Other red flags include Bank of America's plan to become "smaller and more efficient" by decreasing its workforce by 30,000. These cuts are projected to come primarily from the area of consumer banking. However, the number of junior investment bankers at the firm has been reduced by 23% already. When these staff reductions take place, the bank will have a smaller workforce than Wells Fargo, Citigroup, and JPMorgan Chase.
The Bottom Line
With the recent shakiness of the bank stocks slowly but surely fading into the past, investors may still be somewhat leery about adding to - or even hanging on to - their shares of large bank stocks.
But overall, I feel that Wells Fargo is a great addition to investors' portfolios. Share price is expected to increase by roughly 10% over the next 12 months - and share holders get paid approximately 2.5% while they wait.