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Wells Fargo Series L Preferred: Still Bullish


  • We revisit the investment case for WFC.PL - a bank preferred we liked for its higher-quality, above-average yield and long duration.
  • The stock has outperformed the broader banks sector, in line with the BBB-rated segment of bank preferreds.
  • We, however, had expected an outperformance, particularly in a period of lower risk-free rates.
  • We remain bullish as we expect credit spreads to tighten faster than for rates to move back up; however, in case of further weakness, the stock should still perform relatively well.
  • This idea was discussed in more depth with members of my private investing community, Systematic Income. Get started today »

A few months ago, we discussed the Wells Fargo & Co. 7.50% Series L Preferred (WFC.PL) which we liked for its longer-duration and higher-quality features relative to the broader bank's sector. Given the volatility we have seen over the last few weeks, we thought we would revisit the investment case for the stock.

Our takeaway is that while the stock performed in line with the rest of the BBB-rated bank's sector, it did not outperform, despite its longer duration and a sharp drop in risk-free rates. This underperformance versus our expectations leaves us bullish for a few reasons. Firstly, the stock still offers a yield well above the sector average, despite its above-average rating. Secondly, in the more likely scenarios of 1) normalization and 2) further stress, we would expect the stock to perform well as in the former case credit spreads are likely to rally more than interest rates will rise and in the latter, we would tilt towards longer-duration and higher-quality assets than the sector average. The risk to the stock is a period of higher interest rates and wide credit spreads, a scenario we view as the least likely.

Sector Performance By Quality

Let's take a look how the bank's sector performance looks across the quality spectrum. We proxy quality by the S&P credit rating and plot total returns since the start of the drawdown in the chart below. The vast majority of the around 135 stocks cluster between single-B and triple-B ratings with a bunch not rated, called "NR" in the chart.

If we group the stocks by rating (e.g. BBB-, BBB, BBB+ go into the rating shown as BBB in the chart, etc.), avoiding a few stocks with very poor liquidity, then we see a couple of interesting things. First, as we would expect, the highest rated BBB bucket has held up the best in the

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This article was written by

ADS Analytics profile picture

ADS Analytics is a team of analysts with experience in research and trading departments at several industry-leading global investment banks. They focus on generating income ideas from a range of security types including: CEFs, ETFs and mutual funds, BDCs as well as individual preferred stocks and baby bonds.

ADS Analytics runs the investing group Systematic Income which features 3 different portfolios for a range of yield targets as well interactive tools for investors, daily updates and a vibrant community.

Analyst’s Disclosure: I am/we are long WFC.PL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (18)

Vlae Kershner profile picture
I don’t get why you say perpetual stocks should overperform in a time of market weakness. It seems to me the callable issues would do better because call risk diminishes as the price goes down, whereas WFC-L has about the same call/conversion risk it always did (very low).
ADS Analytics profile picture
Because when market is weak, rates typically go down. Perpetual stocks have longer duration hence they should outperform, all else equal. Call risk does go down for callable stocks because credit spreads blow up and prices go down often below the strike.

The key point is that the duration of a callable bond is still going to be below that of a similar non-callable bond. Relatively speaking the duration of a callable bond will increase when credit spreads blow up but it will never exceed that of a non-callable bond, pretty much by definition.
Vlae Kershner profile picture
I get what you're saying, but overall interest rates are a minor factor in a panic compared to worries about solvency. Look what happened to WFC-L in 2009.
ADS Analytics profile picture
It's true that credit spreads have moved a lot more than interest rates but at the same time we can envision a scenario where credit spreads tighten back down while rates remain lower. Ultimately, if rates go up both callables and non-callables get hit while, if rates go down, (let's keep everything else the same) then perps should perform better. It seems like perpetuals give you that additional optionality of outperformance.

Your point about 2009 is beside the point ie if everything goes to zero then yes I agree holding perps over callables doesn't matter but there are clearly scenarios where perps are better than callables. I don't see scenarios where callables are better than perps unless callables pay you a higher yield which they really don't in this case (WFC-Q does have a higher yield right now but if things recover it's going to get called away whereas WFC-L will not).
12 Mar. 2020
25 is where this fraudulent Co. looks attractive
I like the WFC.PL, and currently own it, I bought it closer to its share price now, which is currently yielding 5%. But the common shares which I am purchasing are yielding 6.25% currently. The only downside is a possible future dividend cut for the common share.
glssmrbl profile picture

Are you saying the common shares offer better total return?
coastalcruiser profile picture
My greatest concern with WFC as well as their preferred stock is the payout ratio
It is 1837% THIS IS THE HIGHEST I have ever seen. So the Question of the day is, "Is this normal?"
@coastalcruiser The answer to your 'Question of the day' is: No, it's not normal. But it's also not normal to calculate a dividend payout ratio on a preferred stock. Dividend payout ratios are generally calculated on common stock, as annual dividends per common share/earnings per common share. For WFC in 2019, that was $1.92/$4.08 = 47.05%

I suppose if you wanted to calculate a payout ratio for a preferred stock, you could, but you'd have to calculate the earnings per preferred share for that stock first. Based on the income statement in the WFC 2019 10-K www08.wellsfargomedia.com/... WFC net income was $19,549MM for 2019, and in Note 20 of the 10-K, it says that there were 4.025MM "authorized and designated" shares of WFC-L. That means the earnings per share of WFC-L were $18,984.39 That means that the calculated payout ratio is $75/$18,984.39 = 0.395%

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