DRIP PORTFOLIO

Norwest Goes Morewest
But first a look at Norwest without Wells Fargo
by Jeff Fischer (JeffF@fool.com)


Chicago, IL (September 1, 1998) --Our last banking finalist is the proposed hybrid of Norwest and Wells Fargo, which combined represent the seventh-largest bank holding company in the country.

This year, Norwest (NYSE: NOB) agreed to be acquired by Wells Fargo (NYSE: WFC) in a $34 billion offer. The two companies hold $190 billion in assets, making this our largest finalist. Merging with Wells Fargo gives Norwest a much larger presence on the West coast, but today we'll consider Norwest alone.

Norwest tops Dale's list of five finalists even after considering the proposed merger and the uncertainties involved. The company is favored, in part, due to its strong customer service and focus on building recognition and loyalty. Norwest calls its branches "stores," and it opens new ones at a pace that McDonald's could appreciate. This company is also favored for its profitability ratios and high asset turnover, as well as -- much like Dale's other favorite, Mellon (NYSE: MEL) -- its diverse lines of business.

The company's non-traditional banking services are substantial profit centers. Norwest is the country's numero uno leading mortgage originator and servicer. It provides several types of loans through more than 725 mortgage offices that are efficient profit centers, as Dale discussed. These locations are in addition to Norwest's 3,800 banking stores nationwide.

Other lines of business include the divisions aptly called "Norwest Investment Services" and "Norwest Insurance," whose names are self-explanatory. Meanwhile, "Norwest Financial" -- the company's consumer finance unit -- provides direct loans and traditional financial services from a comprehensive "menu" offered at its stores. The Norwest Financial unit generated a considerably modest 10% of the company's net income in 1997.

Like our other "Rocky Balboa" banking finalists, Norwest is hard-hitting in the interest earning arena. (This makes Norwest the opposite of Trump Hotels (NYSE: DJT), a company that pays $250 million in interest annually). In fact, most of Norwest's revenue comes from -- ta da -- interest paid on loans and leases and "other items." Last year, interest accounted for 69% of revenue, or $6.7 billion of $9.6 billion total. The second largest revenue generator at Norwest was mortgage banking, accounting for 9% of revenue at $875 million. Beyond that, fees and service charges accounted for 8% of 1997 revenue, at $771 million. Finally, insurance is still a relatively new and small line of business, at $331 million in revenue last year, or 3% of the company's total business.

Despite high loan losses in the 1980s (due to an expected food shortage in the 1970s that caused farmers to take loans which proved unnecessary and then unpayable, as we've discussed), Norwest has been able to grow its book value from $3.14 per share in 1988 to $9.01 per share last year. The stock trades at $30 (just above the 52-week low), or 16 times earnings, and it yields 2.40%. This is below our top-yielder, Mellon, which now pays a 2.50% dividend and trades at 17 times earnings.

Norwest's return on equity rivals our top three contenders, weighing in at a recent 20.2%. This puts it on par with Mellon and U.S. Bancorp (NYSE: USB), and slightly below First Tennessee (Nasdaq: FTEN). Almost all of the company's other measures of performance top the industry averages handily, especially asset turnover.

In summary, Norwest has strong management and a very healthy and profitable financial portfolio, all without the caveats of a bank like First Tenn, which is burning cash in order to grow. This, along with the company's strong retail name and a focus on growing shareholder value without undue risk, serve to make the entire Norwest package the most attractive to Dale, ahead of Mellon which is running a close second. But, of course, we can't conclude on Norwest without taking a close look at its potential new Siamese twin, Wells Fargo, as Dale did.

Tomorrow we'll see what Wells Fargo brings to Norwest's dinner table (a fatty steak or healthy vegetables?). To learn more about both companies, please visit Dale's past reports listed in the archived Drip Port columns. Each relevant article is identified by its headline. Dale wrote about these companies on 5/14, 6/15, 6/16, 6/17, 7/16, 7/17, and 7/30. Only after you understand what you're buying should you begin to DRP invest long-term in any company.

The final consideration after understanding this business is the fact that Norwest's DRP has substantial fees. The DRP of Wells Fargo is entirely free. We're working to learn details on the potential new DRP of the merged company. Whatever the outcome, we'll consider our investment options as a whole, with DRP fees being an additional factor to weigh. Our other finalists don't have fees.

Fool on!

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9/1 Close
Stock Close Change CPB $52 3/8 +2 INTC $76 +4 13/16 JNJ $72 3/8 +3 3/8
Day Month Year History Drip 4.71% 4.71% 5.03% (10.56%) S&P 500 3.83% 3.83% 2.45% 4.51% Nasdaq 5.06% 5.06% 0.30% (1.17%) Last Rec'd Total # Security In At Current 08/03/98 4.125 CPB $54.395 $52.375 07/01/98 9.724 INTC $80.239 $76.000 08/07/98 6.543 JNJ $70.138 $72.375 Last Rec'd Total # Security In At Value Change 08/03/98 4.125 CPB $224.38 $216.05 ($8.33) 07/01/98 9.724 INTC $780.21 $738.99 ($41.22) 08/07/98 6.543 JNJ $458.92 $473.55 $14.63 Base: $1800.00 Cash: $286.03** Total: $1714.62

The Drip Portfolio has been divided into 76.682 shares with an average purchase price of $23.474 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
8/24/98: sent $200 to buy more CPB.