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Ask the Investor: “Is Wells Fargo & Company (WFC) a long-term buy?”

By: Ryan T. Fulmer
Monday, March 4, 2019

In 2016, Wells Fargo was fined $185 million for the creation of over 3.5 million fake accounts. The scandal was far reaching and resulted in the termination of 5,300 employees. John Stumpf, CEO, forfeited his 2016 salary, bonus, and stock awards which totaled over $40 million.

For many months after, Wells Fargo was hit with fine after fine, and various government organizations began investigations.

Today, the scandal is gradually fading in consumer and investor minds and significant changes within the board and leadership team have hopefully remedied the underlying causes.

As investors, we are always skeptical of management, and corporate governance in general, when a scandal of this size pops up. And, after the scandal, the broader stock market agreed, as the stock price declined to under $45 per share in mid-2016 from a then-recent high of $57, about 12 months prior.

Stock prices today incorporate investors expectations of a business’s future profitability. As Wells Fargo’s stock price sank, investors believed that large fines would be in the company’s future and that profitability would be damaged.

Most concerns of 2016 to 2018 have now been realized, but the valuation of Wells Fargo’s stock is about 150% of 2019’s tangible book value (or liquidation value). Valuations are never static and in the great recession many banks traded below liquidation value due to concerns of future credit losses.

From a historical perspective, Wells Fargo has often times traded at over 300% of tangible book value. But given today’s low interest rates, most high-quality banks that generate strong returns on equity are closer to 200-250% of tangible book value. Today’s valuation seems relatively inexpensive compared to bank peers in general, let along high-quality franchises with excellent profitability.

Shareholders receive a dividend yield of greater than 3.50% with a good chance that the dividend will grow at a rate outpacing inflation.

Over the next decade, we think the highly profitable business will continue to grow their tangible book value, pay a growing dividend and over a very long period of time receive a valuation more in-line with high-quality large-cap banking peers.

What could go wrong?

There could be more skeletons in the closet that have yet to surface. It is hard to know the likelihood of this scenario, but since the scandal, many different regulatory bodies have been investigating Wells Fargo and would hopefully have found any skeletons, if they did exist.

Potential investors should still be cautious. If Wells Fargo stumbled again, regulators would likely not allow the bank to grows its assets and may restrict the banks ability to pay dividends or repurchase shares. For these reasons, you should consult your portfolio manager prior to considering an investment in Wells Fargo and Company (WFC).

Sources:          CNN.com

                        Wells Fargo and Company Reports

 

Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.

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