jclyak's  Instablog

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JD, CPA, 18 years CEO/CFO, investor for 50 years
  • Wells Fargo Should Buy....Wells Fargo! 0 comments
    Jun 23, 2012 3:17 PM

    Over the past year I've been pleased with all the progress Wells has made in terms of cleaning up all high cost debt from its balance sheet…the 8% + TRUPs, etc.. I'm also very pleased that Wells really doesn't have any more of this easy "debt" fruit to pick. Furthermore, at the end of Q2 Wells will be at 8.2% Basel III capital, enough to satisfy the regulators forevermore.

    What's next?

    If I were Wells I'd look no further than the mirror to determine the optimal capital deployment over the next few quarters or even years. Wells pre-tax annual ROI on stock repurchases is at minimum 15%...assuming earnings remain flat, except for the anticipated $1.5 Bil. a quarter expense reduction by Q4.

    What makes the 15% ROI particularly juicy is that it is achievable at a stock repurchase price of $38 per share. Let's do some math:

    In Q1 Wells made $.75/share after tax. However, it had $419 million of intangible deposit amortization which, if added back to earnings, puts the per share earnings at $.83. If one adds the anticipated $1.5 bil./Q of expense savings management has repeatedly promised, earnings go north of $1/share per Q and company earnings at about $5.5 Bil. a quarter after taxes …This is baked in, at least in the eyes of management, and I believe management.

    Wells is spending about $1.1 bil. Q on dividends, so it is left with $4.4 bil./Q to spend. If Wells saves $600 mill. / Q for capital enhancement, that leaves $3.8 billion to spend on share repurchases, while still keeping the regulators happy. With a post tax P/E of say 9, the pre-tax ROI is 16% on this repurchase for the company.

    Fast forward to 2014 with a normalized yield curve and 8 Qs of a 2% buyback program..What do you think the ROI will be on the 16% of the float that was repurchased if the company's earn rate improves by $10 bil./year with a normalized NIM, not to mention the rest of the earnings improvement thru normal revenue growth. I believe management has to be visualizing a 25% forward ROI on share repurchases? I believe buybacks at even $50++ a share math nicely for Wells in comparison with almost any other conservative investment option.

    Expect to see the buybacks begin in Q 3 in a major way.

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