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Wells Fargo Should Buy....Wells Fargo!

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.