9 Reasons to Buy Warren Buffett's Favorite Bank

When compared to fellow big banks, Wells Fargo may look expensive, but here are nine reason it's still a great investment.

Jan 9, 2014 at 7:28AM

Wfc

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. 

Stumpf

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.

Wells Fargo From Website Horses Snow

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.

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

Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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