What Makes Wells Fargo Worth Owning?

The real-money Inflation-Protected Income Growth portfolio owns shares of Wells Fargo (NYSE: WFC  ) . Wells Fargo, like every company in that portfolio, earned its place because at the time it was purchased:

  • Its shares appeared to be reasonably priced.
  • Its balance sheet looked solid.
  • It had a covered dividend with a history of increases.
  • That dividend looked capable of continuing to rise.
  • The company fit reasonably well within the portfolio from a diversification perspective.

Still, just because a company fit a portfolio at one time doesn't mean it will fit forever. This article reviews the current state of several of the key factors that made Wells Fargo worth owning to determine whether it still has what it takes to retain its spot in the IPIG portfolio.

Valuation
Based on a discounted earnings analysis, Wells Fargo's business looks to be worth around $239 billion. Its stock recently closed at a price that gave the company a market capitalization of $232 billion. The two are close enough to say that Wells Fargo looks reasonably priced. Still, any fair value estimate is based on projections of an unknown future, and nobody has the ability to predict it exactly correctly.

Result: Hold, based on valuation.

Balance sheet
Wells Fargo has a solid balance sheet, with a debt-to-equity ratio of around 1.2. That reasonable debt-to-equity ratio gives the company the flexibility to manage through financial turmoil and economic cycles while remaining strong. In addition, the company has more than $200 billion in cash and federal funds on its balance sheet, which positions it well for servicing its existing debt while continuing to reward shareholders.

Result: Hold, based on balance sheet.

Dividend
Wells Fargo was one of the first major banks to resume increasing its dividend after the recent financial crisis. The company's quarterly dividend currently sits at $0.30 per share, where it has sat for the past three quarters. Dividend growth is an important characteristic that the IPIG portfolio actively seeks, and Wells Fargo has shown itself to be one of the most capable banks from that perspective.

In addition, Wells Fargo's dividend remains well covered, with a 27% payout ratio. That payout ratio means that the company retains 73% of earnings to invest in future growth, while directly rewarding its shareholders with cash for the risks they take by investing.

Result: Hold, based on dividends.

All told: a company still worth owning
Looking at its valuation, its balance sheet, and its dividend, Wells Fargo still maintains the essential qualities needed to retain its place in the Inflation-Protected Income Growth portfolio. That may change over time, though, depending on the company, its competition, regulatory shifts, the whims of the market, and changes in its operating environment that reduce its ability to thrive. As a result, the company will again be reviewed in the future to make sure it still deserves a spot in the portfolio.

Is Wells Fargo the only big bank built to last?
Wells Fargo is certainly a solid bank, and it was one of the fastest to recover from the recent financial meltdown. Justifiably, many investors are terrified about investing in big banking stocks after that crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." Is it Wells Fargo? You can uncover that top pick -- which is also a banking stock that Warren Buffett loves -- in The Motley Fool's new report. It's free, so click here to access it now.


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