9 Reasons to Buy Warren Buffett's Favorite Bank

There's a lot to like about Wells Fargo (NYSE: WFC  ) : it's one of the most stable banks in the world, Warren Buffett has made it Berkshire Hathaway's top holding, and the stock price is up over 30% over the past year.

However, according to a number of investors -- even in a recent article, "Is it Finally Time to Buy Bank of America" by yours truly -- when compared to fellow big banks Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) , the stock looks expensive.

While comparatively Wells Fargo stock looks expensive, I've been ignoring one of Warren Buffett's most valuable lessons: "It's far better to by a wonderful company at a fair price, than a fair company at a wonderful price."

Here are nine reasons this premium bank has earned its value. 

1. "To satisfy all of our customers' financial needs and help them succeed financially." -- John Stumpf, Wells Fargo's CEO
As John Stumpf would go on to say, putting the customer first is at the heart of the company's culture, and it's what unites the company. As investors, we often dismiss things like mantras and company culture -- that's a mistake.

Companies are thousands of people coming together to perform a task. Great companies can build communities with their vision and leadership, and those are the companies worth investing in.

2. Wells Fargo has battle-tested management.
Wells Fargo has more than enough experience at the top, and it showed as the bank surged through the financial crisis nearly unscathed. The bank has one of the premier CEOs in all of banking, and Stumpf's 10 direct reports average more than 28 years of service with Wells Fargo.

3. 1 in 3 U.S. households bank with Wells Fargo.
Wells Fargo has 70 million total customers.

For banks, checking and savings accounts are just the beginning of a relationship. This relationship is nurtured though the cross-selling of products. Wells Fargo, according to Stumpf, is best-in-class at cross-selling customers. That creates enormous competitive advantage.

4. The merger with Wachovia was a game-changer.
Thanks to the merger, Wells Fargo is now the third largest retail broker in the country; it's the No. 1 bank in auto lending, small business, and mortgages; the company has a stronger investment bank; and it helped increase core checking and savings deposits by $271 billion.

5. Wells Fargo has had 15 consecutive quarters of EPS growth.

WFC EPS Diluted (Quarterly) Chart

Steady and consistent growth is what makes Well Fargo the premier bank in the U.S. So, for those investors who enjoy sleeping at night, you can't do much better than Wells Fargo.

6. Since 2010, Wells Fargo has increased its dividend by 500%.

WFC Dividend Chart

The Federal Reserve reviews banks by way of the Comprehensive Capital Analysis and Review (CCAR). This stress test determines if banks have sufficient amounts of capital to operate under, you guessed it, stressful conditions.

Banks can ask to raise dividends when the CCAR is under way. The better the bank's capital situation, the more likely the request gets approved. With a quick look at the chart above, we can see how that's worked out recently. Score one for Wells Fargo.  

7. "We have a lot of our liquidity sitting on the sideline."
In Fool contributor Morgan Housel's article, "How I Think About Cash," he explained that holding cash gives investors optionality -- or, the ability to seize opportunities as they arise. It works much the same way for banks.

As the economy continues to recover, we're likely to see businesses get more aggressive, and more renters looking to buy houses. For banks, that means a greater demand for loans. Having the excess liquidity, as Wells Fargo does, to make those loans will be essential.

8. With an over $1 trillion deposit portfolio, Wells Fargo has less than 5% in CDs.
CDs, when compared to other types of deposits, carry one of the highest interest rates. This is important because the higher the interest rates on deposits, the less the bank returns on loans.

Wells Fargo's 3.4% net interest margin -- which measures a bank's return when accounting for interest expenses -- clobbers Bank of America's and Citigroup's 2.5% and 2.8%, respectively.

9. Wells Fargo is best-in-class in efficiency.
According to Stumpf, "While over 80% of our customer interactions are self-service, most customers open their first account and establish their banking relationship by visiting one of our many stores."

So, how does a bank that 1) depends on its physical locations, and 2) is already best-in-class in efficiency become even more efficient?

Wells Fargo is currently in the beginning stages of testing 1,000 square foot neighborhood stores. Stumpf stated that these stores are approximately one-fifth the size of traditional stores and have shown to be not only effective, but wildly more efficient. If neighborhood stores prove to be as effective as Stumpf suggests, this could be a home run for Wells Fargo.

Secure your future with nine rock-solid dividend stocks
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Editor's note: A previous version of this article stated Wells Fargo was up 30% YTD. The Fool regrets the error.

Read/Post Comments (2) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2783493, ~/Articles/ArticleHandler.aspx, 8/31/2015 3:59:55 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dave Koppenheffer

Dave Koppenheffer, is a contributor for the Motley Fool's financial sector. And much like Dwayne "The Rock" Johnson, when he speaks, he speaks with an earnest vibe and an earnest energy.

Today's Market

updated Moments ago Sponsored by:
DOW 16,567.48 -75.53 -0.45%
S&P 500 1,975.84 -13.03 -0.66%
NASD 4,785.60 -42.73 -0.88%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 3:44 PM
BAC $16.36 Down +0.00 +0.00%
Bank of America CAPS Rating: ****
C $53.59 Up +0.31 +0.58%
Citigroup Inc CAPS Rating: ***
WFC $53.36 Down -0.18 -0.34%
Wells Fargo CAPS Rating: *****