Wells Fargo (WFC) is a leading financial services company that specializes in providing a diversified set of banking, investment, and mortgage products and services, as well as consumer and commercial finance, to individuals, businesses, and institutions.
The company’s main services include consumer financial products and services, including checking and savings accounts, credit and debit cards, and auto, mortgage, home equity, and small business lending. At the same time, Wells Fargo is also involved in financial planning, private banking, investment management/banking, and fiduciary services.
The company is the third-largest diversified bank in the U.S., only behind JPMorgan Chase (JPM) and Bank of America (BAC), featuring a market cap of around $224 billion.
During these days that low rates still persist, Wells Fargo’s performance has shown signs of weakness, with the company even cutting its dividend back in 2020.
While the bank’s performance remains rather underwhelming, Wells Fargo remains profitable and is actively buying back quite significant amounts of stock, which could result in decent shareholder returns ahead. Still, I believe there are better picks in the industry, so I am neutral on the stock.
Recent Performance
Wells Fargo’s Q3 results were rather mixed, with total revenue declining 2.4% year-over-year to $18.8 billion. While the company saw improvements in consumer banking, commercial banking, wealth management services, and investment banking, net interest income was $8.91 billion, declining 5% from $9.38 billion during the prior-year period.
This was mainly due to lower loan balances reflecting soft demand and elevated prepayments and the impact of lower yields on earning assets. Non-interest income was $9.93 billion, staying constant year-over-year.
Wells Fargo ended the quarter with total loans of $863 billion, an increase from $853 billion sequentially but a decline from $920 billion in the comparable period last year. Deposits were $1.47 trillion, higher than $1.44 trillion sequentially and $1.40 billion a year ago.
Overall, EPS came in at $1.17, up sharply from $0.70 a year ago, but the significant increase was only due to non-recurring items for the credit loss provision release. The company did not provide guidance for its upcoming earnings.
Are Capital Returns Sufficient Enough to Buy the Stock?
Wells Fargo hiked its dividend per share last year following the company’s 80% dividend slash back in 2020, but it still remains less than half its pre-pandemic levels. Yet, shares are currently trading at similar levels to 2019, resulting in the current dividend yield hovering at around 1.4%.
In my view, even if the company were to grow the dividend relatively rapidly going forward, the stock’s yield would still be rather underwhelming compared to those of its industry peers.
However, we should consider the company’s total return profile, which includes strong share repurchases. Wells Fargo quickly resumed its stock buyback levels near its pre-pandemic levels, repurchasing around $5.32 billion in the previous quarter alone. This implies an additional 2.3% “buyback yield,” which adds to the company’s total returns.
Considering that the bank is trading at a forward P/E of around 13.8, I believe the stock is somewhat reasonably valued. That said, I would require a combined yield north of 4.5% to ensure that Wells Fargo makes for a worthwhile investment. Hence, I don’t find the bank’s ongoing capital returns sufficient enough.
Wall Street’s Take
Turning to Wall Street, Wells Fargo has a Moderate Buy consensus rating, based on 12 Buys and three Holds assigned in the past three months. At $57.85, the average Wells Fargo stock price prediction implies 2.7% upside potential.
Conclusion
Over the past few years, the low-rate environment persisting has not allowed Wells Fargo to meaningfully grow its financials. The bank’s latest report was further rather mixed. Based on the stock’s current dividend and ongoing stock repurchase levels, I don’t believe allocating capital to Wells Fargo makes for an extraordinary opportunity.
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