There were always two contradictory ideas I had to carry around in my head when I first started to study investing: (1) bank stocks have a tendency to blow up every generation or two, completely wiping out shareholder equity, and (2) Wells Fargo always found a way to survive these blow-ups and deliver exceptional returns. What’s the magic that seems to make Wells Fargo the superior bank stock investment for those that want to build sizable generational wealth?
You can look at just about any long-term period and the results are staggering. Bought Wells Fargo in 1972, on the eve of a 75% banking sector crisis? You compounded at a rate of 13.5% through the present day and needed to only put $4,000 into Wells Fargo stock to own a million dollars worth of it today. Bought it in 1981? The compounding rate of Wells Fargo stock was 14.7% annually, and you would have only needed $8,500 to have a million dollars worth of it today. How about 1990? You again would have gotten a 14.7% compounding rate and would have needed to make $28,500 investment to have $1,000,000 worth of WFC stock with your name on the proverbial stock certificate.
Even over a shorter period, which doesn’t have as much time to burn off the effects of the financial crisis, the results are still impressive. Bought Wells Fargo stock in 2000, at a split-adjusted $17 per share? You not only benefitted from the capital appreciation up to the current price of $48 per share, but you also got to collect $15.29 in dividends along the way. No one talks about this, but despite the financial crisis that cut Wells Fargo’s profits by over 70 and sent the stock price from the $40s to the single digits, you still got to compound your money at an annual rate of 8.42% and the figure is over 9% with dividends reinvested.
What makes Wells Fargo stock such a superior investment? Why is it that Warren Buffett, John Neff, Charlie Munger, Donald Yacktman, Seth Klarman, and every manager of the Fidelity Contrafund saw fit to load up on this stock in a meaningful way at some point in the past quarter century?
It’s a combination of favorable factors, some of which are subsets of each other, interacting: (1) Wells Fargo has a low cost capital base, enabling it to wring out the most profits from its loan, wealth, and service portfolios; (2) it has a low-cost capital base because it cross-sells over 6 products to a typical consumer and therefore increases loyalty because people are reluctant to leave such entrenchments; (3) it bought Wachovia on the cheap, which added billions in earnings power and also inherited their exceptional customer service; (4) it has strict underwriting standards (if your credit is iffy, Wells Fargo is not where you go to get a mortgage) and thus generally low default rates; (5) it is very well capitalized, meaning it can handle high default rates which aren’t even a high risk given its underwriting cutoffs; (6) the loan portfolio still grows in the upper single digit range because of a strong mortgage and business loan division; and (7) the dividend payout only consumes 36% of profits and leaves lots of room for share repurchases.
Those are the factors that play off of each other to give shareholders superior returns. Also, Wells Fargo tends to be reasonably valued in most instances, which gives greater effect to the share repurchases and enhances the returns for those shareholders that reinvest dividends along the way.
For my third podcast, I provide an overview of these factors that make Wells Fargo the superior bank investment, and provide a chart that gives you an aerial glimpse of where Wells Fargo stock has gone the past sixteen years as well as general expectations about where it is going.