Is Wells Fargo A Classic Value Play For Dividend Investors?

| About: Wells Fargo (WFC)
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The stock is now down 13% since its scandal began.

What do the current valuation metrics of the stock look like?

How has the stock done against the market over time?

It seems to have all of the makings of a classic value play. The stock is now down over 13% from its recent high. In addition to this, it has a solid balance sheet with a rock-solid dividend yield of 3.4%, in a yield-starved world.

But the music that is really tickling value investor's ears is all of the negative headlines and sour sentiment towards the stock.

Throw in a new CEO who vows to turn the company around from its recent scandal, and you just have to stop and take a close look!

Wells Fargo (NYSE:WFC) was started way back in 1852 when Henry Wells and William G. Fargo gained control of the Butterfield Overland Mail Company in order to bring banking services to California.

Over the years it has had a very storied and colorful history, including a $25 billion dollar bailout by the U.S. government back in 2008. Today it is the second-largest bank in the world by market capitalization.

Once it got back on its feet from the 2008-2009 financial crisis it established Wells Fargo securities, so that could do a little cross-selling of its new securities services to its banking customers and vice-versa.

Its cross-selling business really took off with the illegal opening of over 2 million fake bank accounts done by thousands of its employees under the "un-watchful" eye of now former CEO, John Stumpf.

These are the scandals that value opportunities are made of - or are they?

Let's have a look.

Wells Fargo currently has a market capitalization of just over $225 billion. $35 billion in market-cap has disappeared since the current scandal began in late August.


Here are how its valuation numbers currently stack up.

It currently sports a P/E ratio of 11X. Over the last ten years, Wells has averaged a P/E ratio closer to 13X. It is currently trading about 20% lower than its average P/E ratio, but it still has quite a bit of unknown risk and fallout from its current scandal.

Let's not forget that Elizabeth Warren is in no way done with Mr. Stumpf or the company.

Wells Fargo's forward P/E ratio is currently 10.8X based on just 2% growth in earnings expected for next year vs. this year. Let's also not forget that there is still plenty of downside risk to those current earnings estimates for next year. Again, this is not exactly a screaming bargain.

The current price to sales ratio of Wells is 2.68. Over the last ten years, its price to sales ratio has averaged between a low of 1.4X and a high of 3.5X. It is currently not much of a bargain at its current price to sales ratio of almost 2.7X.

But, price to book value ratio is the most important ratio as it relates to bank stocks. Its current price to book value ratio is 1.26X. Over the last ten years, its price to book value ratio has ranged between a low of 1.1X and a high of 2.1X. The average price to book has been about 1.4X. I do see a little value here, but it is not exactly screaming out at me.

I like to look at five-year target prices. As an analyst many years ago, my job was to find out what a company does, come up earnings estimate for its current year, the following year and a five-year average growth estimate.

As of now the consensus estimate for Wells Fargo for this year is $4.02 per share. This is 2% lower than last year's earnings. Next year Wells Fargo is expected to get back to where it was in 2014 with $4.10 in earnings. This would be a scant 2% increase over this year.

If these future numbers are close, Wells will have had almost no earnings growth at all since 2014. This is not good. This will punish its multiple vs. its peers. As of now the five-year annual growth rate just got lowered to 7.7% per year from a previous average of just over 9%.

At 7.7% average growth over the next five years, Wells would have $5.58 in earnings five years from now. If we attach its average multiple over the years of 13X at that point in time, we come up with a 5-year target price of about $72.50. With a dividend yield of 3.4%, it has almost 80% upside potential over the next five years.

From a pure valuation point of view it looks decent, but not fantastic. I like a little performance with my value, however. How has the stock done from a performance point of view over the last one, three, five and ten years?

As you can see from the screen shot above, the stock has delivered basically market returns over the last decade. These performance numbers include the dividends paid along the way. For those of us seeking alpha, this does not give us a lot of conviction.

Over the last five years, the stock has outperformed the market by a bit, but let's not forget that it was helped out by a government bailout and 2 million illegal accounts along the way. Over the last three years, the stock has underperformed the overall market.

The last twelve months have been horrible. Wells Fargo is down 10.5% while the market is up 7.0%. That is a big differential. It makes me wonder why Wells Fargo would suddenly start delivering any kind of significant alpha when it has failed to do so over the last decade.

When I weigh together a decent valuation along with just average performance, I currently get an overall ranking of just 1,624 out of 4,185 stocks, exchange traded fund and mutual funds that I currently track in my database.

I currently have no position or interest in the shares of Wells Fargo. What do I like for dividend seekers right now?

It appears to me that the steep sell-off in utilities that I warned about back in my July article is starting to run its course. The utility sector as measured by the ETF (NYSEARCA:IDU) is now down a whopping 13%, since the extreme valuations that dividend seekers seemed to be ignoring at that time.

I would still be careful with the utility sector, as not only are valuations a little high, but this sector is also very interest rate sensitive. I would recommend using the same methodology that I used above on Wells Fargo, before I started buying utilities again.

Meanwhile, I also warned about the REITs in that article. They are now down about 12% since that valuation warning that I sounded. I found it incredible that many articles were still recommending REIT after REIT after REIT, despite historically high valuations. A 12% correction can wipe out years of dividends if valuations are ignored.

I would still step very cautiously in the REIT sector. I am just now seeing a few decent valuations show up in my daily screens, but overall the sector is still not cheap and it too is very interest rate sensitive.

In my July 25th article, I warned about the unprecedented risk in the bond market. I did not just fall off the market turnip truck. I have witnessed several bubbles during my two decades in the market. I warned about the extreme housing and mortgage bubble back in 2008 before the financial crisis hit.

We now have interest rates that are at 5,000-year lows! That is right, 5,000-year lows. I firmly believe that the next bubble to burst at some point in the future will be the bond bubble. With a bond market that dwarfs the stock market in size, what would the ramifications of any kind of selling in the bloated bond market be?

It is definitely worth taking a little time to think about it.

I have been asking my listeners, readers and followers to examine their current portfolios for interest rate risk. I don't care what traditional asset allocation models say, these are not normal times. Once again, interest rates are at 5,000-year lows. How can anybody build historic bond market returns into their models in historic times like this?

I gave three non-interest rate sensitive ideas in my September 3rd article. I gave three of my current top growth ideas in my September 19th article.

In addition to this, I gave three more of my current, favorite dividend payers in this treacherous interest rate environment.

I would pass on Wells Fargo right now and look elsewhere.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.