It is amazing to me how: (1) Wells Fargo has been through so many booms and busts and (2) still managed to deliver absolutely extraordinary results to shareholders over just about every long-term measuring period imagine. Bought Wells Fargo stock in 1950? You went on to compound at 15.66% annually. 1960? 16.64% annually. 1970? 14.20% annually. 1980? 15.47% annually. 1990? 14.95% annually. 2000? 8.40% annually. 2010? 13.16% annually. With the exception of 2000 when Wells Fargo was trading at a lofty 21x earnings valuation, this bank has been delivering nice double-digit returns to shareholders from nearly every long-term measuring period.
It is the signature holding of Warren Buffett’s common stock portfolio, which stood at 483 million shares as of the most recent annual letter. Based on Friday’s closing price of $49 per share, the Berkshire position in Wells Fargo is currently $23.6 billion.
You know what I found enormously interesting? That Wells Fargo has returned 14.75% annually since 1989 while Berkshire Hathaway itself has returned 13.66% over the same time period. Berkshire, which is diligent, has huge cash reserves, finances lucrative deals, and has a large collection of businesses run by the world’s most famous investor, got outperformed by a goliath-sized bank that suffered two deep crises, cutting its dividend and experiencing a 75% stock price decline during the financial crisis.
If you invested $25,000 into Wells Fargo back in 1989, you would have $973,000 today. Put the same amount into Berkshire? $854,000. The low-cost deposit base, mortgages banked against appreciating California assets, and low dividend payout ratio mixed with shrewd use of stock buybacks makes Wells Fargo a bank that is perpetually on the rise.
Even during the financial crisis, it remained profitable–profits fell from $8 billion to $2.6 billion, but the business itself was weathering the storm quite fine. The dividend payment at the time was doubled that, so there was unfortunately a cut for shareholders, but the dividend is now above 2007 levels and the global financial crash proved to be a blessing for Wells Fargo shareholders because the bank gobbled up Wachovia on the cheap and has been able to expand earnings rapidly during the recovery (profits of $2.38 in 2007 fell to $0.70 in 2008 before rebounding to $2.21 in 2010 and growing in a near linear fashion straight to $4.15 at the end of 2015).
Even now, the stock is not a bad deal at $49 per share. When I read the coverage of other analysts on the stock, I think there is an emerging trend of letting emotions influence the analysis of the stock. Because Wells Fargo was either a good deal or an excellent deal depending on when you analyzed it between 2008 and 2012, people are unnecessarily dour on the stock now that it offers investors a fair deal. There is nothing exceptionally wise or particularly foolish about paying $49 per share for Wells Fargo right now. It is not a great deal, nor are you overpaying. You’re paying a fair price.
The reason why I find it worthy of analysis is that it is run so much better than its peers. Even though the loan base is at $900 billion, it is still growing the loan portfolio at a rate of 7.9% annually. And yet, it has the lowest loan charge-off rate out of any of the big banks (with only 0.31% charge-offs).
Usually, high growth and conservatism do not march hand in hand, but in the case of Wells Fargo, it is easy to see why Buffett likes it so much. The loan portfolio has grown at a rate of 9.5% over the past ten years, and it is expected to grow between 6-8% over the medium term. Earnings have grown at 8.5% over the past ten years, which I found spectacular given that this period includes the operating environment of 2008 and 2009.
And the current dividend payout is only $1.50 per share, compared to $4.15 in earnings. That’s only a 36% dividend ratio. It would not surprise me to see Wells Fargo grow its dividend between 7% and 10% annualized for the next five years, as the combination of higher interest rates, share repurchases, and the growth of the portfolio continue to drive returns.
It is amazing to me how Wells Fargo is able to achieve such substantial growth despite its enormous size. It was one of the top five banks in the country back in 2001 when earnings were at $0.99 per share. In the span of fifteen years, Wells Fargo has been able to grow profits to $4.15 per share. A large bank, which endured a crisis, managed to quadruple profits in a fifteen-year period. It has delivered excellent returns for over half a century. It has a cluster of great investors, from Munger to Buffett to Yacktman, give it the seal of approval by making unusually large investments in it. The payout ratio is low, the loan portfolio is growing at a high single digit clip, and it stands to catch a tailwind from higher interest rates and expansion efforts in the midwest and northeast post-Wachovia. The story of double-digit returns is far from over with this stock, even though the price is not as attractive as it once was. But the combination of quality and growth make this stock a near permanent hold, and it is suitable for dollar-cost-averaging at this time.