U.S. housing markets are on their way to a recovery. Where the rebounding markets will help housing and related stocks, they also tend to benefit U.S. banks that have a significant lending exposure to housing markets. Wells Fargo (WFC), among others, is considered to have leading exposure in the U.S. housing markets. This significant exposure led the bank to report record profits at the end of the most recent quarter. This improved operating performance has also led to elevated shareholder distributions. For the same reason Warren Buffett has added to his position in Wells Fargo.
The bank announced an increase in its shareholder distributions by 200 million shares, which leaves the bank with another 40 million shares that it could repurchase once it gets the approval from its Board of Directors. The rebounding U.S. housing markets and the benefit they will provide to the bank in the coming future makes us bullish on the stock.
Accelerated Share Repurchase:
While Bank of America (BAC) and Citigroup (C) refrain from an increase in shareholder distributions, and JPMorgan (JPM) forced to suspend its share buyback program in May after the massive trading loss it reported, Wells Fargo, America's largest home lender, announced on October 23 an increase of its share repurchase program by another 200 million shares, when it announced its quarterly dividend that is payable in December 2012. The stock offers a dividend yield of 2.6%. The share price of the San Francisco-based bank rallied soon after the announcement of an increase in the dividend repurchase program, which now stands at $6.9 billion. The bank has already spent as much as $2.6 billion in share repurchases since the beginning of the current year, while it still has 40 million shares in its buyback tank that it can announce for repurchasing once it gets the approval from its Board of Directors. Therefore, investors can expect another increase in share repurchase in the coming quarters.
Most Recent Quarter's Performance:
The bank posted record profits at the end of the third quarter, largely on boosting mortgage related revenues. While the top line missed consensus mean estimates, the bottom line exceeded analyst estimates by 87 cents. Revenues related to mortgage banking surged 50% over the same quarter of the previous year.
The bank has a significant exposure to U.S. housing markets, which are on their course to a rebound. The Case-Shiller national home price index increased from 128.2 in the last quarter to 131.08 currently.
The 30-year mortgage rates are pushed down further to record low of 3.37% by the Fed's third round of easing. If the Fed accelerates bond purchasing, the rates will go down further, forcing more and more homeowners with underwater mortgages to refinance their home loans. Therefore, we believe going forward, the bank will benefit from this improvement in the U.S. housing markets.
WFC's stock trades at a premium of 28% to its book value. Analysts have a consensus mean price target of $38.22 for the stock, which is currently priced at $33.8 per share. WFC's closest competitor, Bank of America , trades at a 53% discount to its book value.