Company Description: Wells Fargo & Company, with March 31 assets of $1.85 trillion, is the fourth largest U.S. bank, by global assets, but has the largest U.S. lending footprint.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
WFC is trading at a discount to only 4.) above. When also considering the NPV MMA Differential, the stock is trading at a 54.1% premium to its calculated fair value of $34.53. WFC did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
WFC earned no Stars in this section. The company has paid a cash dividend to shareholders every year since 1939 and has increased its dividend payments for 8 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $581 is below the $2,700 target I look for in a stock that has increased dividends as long as WFC has. The stock's current yield of 3.23% exceeds the 3.01% estimated 20-year average MMA rate.
Peers: The company’s peer group includes: Citigroup Inc. (C) with a 2.6% yield, Bank of America Corporation (BAC) with a 2.1% yield and JPMorgan Chase & Co. (JPM) with a 2.9% yield.
Conclusion: WFC did not earn any Stars in the Fair Value section, did not earn any Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of zero Star. This quantitatively ranks WFC as a 0-Star Avoid stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $29.02 before WFC's NPV MMA Differential increased to the $2,700 minimum that I look for in a stock with 8 years of consecutive dividend increases. At that price the stock would yield 5.9%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 10.4%. This dividend growth rate is higher than the 4.6% used in this analysis, thus providing no margin of safety. WFC has a risk rating of 2.25 which classifies it as a Medium risk stock.
As long-term interest rates rise and loan growth accelerates, WFC is well-positioned to grow net interest income. The bank is the largest deposit gatherer in major metropolitan markets across the country. WFC is trading well above my calculated fair value price of $34.53. Its free cash flow payout of 35% (flat with prior) is below my desired maximum, while its debt to total capital of 75% (up from 33%) is above my desired maximum. For now, I will wait for a more opportune time before initiating a position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was held no position in WFC (0.0% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: WFC, C, BAC JPM,
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