Recently, I have my eyes on Wells Fargo & Co (WFC) and it looks like a great buy at current prices. When my covered calls for my other holdings got exercised earlier this month, I had extra cash freed up in my DGI Portfolio. This was a sign for me to buy shares of WFC. I used the freed cash to buy 200 shares of WFC at $47.95 on April 6. The very nice day it dropped to the mid $46’s, this usually happens to me, but that is the life of an investor — you never know what happens the next day after you buy. Fortunately, for me I made peace with myself before I bought the stock and know that it will be a good long term investment. So I’m thinking, in the long run, this stock will be worth $60 and beyond. At current prices, WFC is undervalued and a great buy. Below are my reason for a bull case.
- Great Fundamentals
This company has great fundamentals. It is trading around 11x the earnings per share and a beta of a 0.89.
- Good Dividend Growth
WFC has a 5 year dividend growth of about 25%. The most recent dividend increase was from $0.35 to $0.375 in May 2015, which comes out to only about a 7% increase. WFC is due for another increase in May 2016 and hopefully the increase will be at least 10%.
- Low Dividend Payout Ratio
WFC’s dividend payout ratio is about 35%. This is a very low figure and this means that WFC can easily increase their dividend payout without worrying about over leveraging themselves.
- Bargain Price
Currently WFC is trading near the bottom of the 52-week price range of$44.50 – $58.76. Buying near the bottom of this range should give new investors a big safety margin. Many of the bad news should be priced in the stock, including the $1.2B settlement with the US DOJ for the mortgage issue.
- Conservative culture
WFC has a conservative culture where they like to keep their businesses focused and efficient. Also, they do not invest in very risky assets and thus survived the financial crisis and recover faster than any of the other banks.
- Warren Buffet has around 10% ownership
Warren Buffet, arguably the greatest investor in the world, has almost a 10% ownership in WFC. He thinks WFC is one of the best, if not the best banks out there. We know that Mr. Buffet is a valued investors and therefore this means that there must be tremendous value in WFC.
- Positioned for future rate hikes
Currently, we’re still in a low rate environment and WFC is still managing their businesses very well despite the low margins. Once the rates start climbing again, and they will climb higher, it’s just a matter of time, the margins for WFC loans will go up and this will help their bottom line. Therefore, WFC is poised well for a low rate environment that will increase rates in the near future.
In conclusion, WFC is one of the best bargain buys right now for dividend growth investors. I can see WFC making another decent dividend increase in May and all the months of May subsequently. At the current prices of mid to high $40’s, and at a P/E of 11, this is a great entry or adding point to dividend investors.
Dividend investors, what do you think?
Source: Google Finance