Wells Fargo & Co Is About to Reach a Major Milestone

Wells Fargo & Co (NYSE: WFC  ) is within shouting distance of a prestigious accomplishment: becoming the largest U.S. bank by market capitalization......ever.

Despite shares prices drifting down over the past few sessions, the current market cap is a heady $275 billion; just $8 billion less than the $283 billion marker pegged by past-titan Citigroup (NYSE: C  ) during its go-go days of 2001. Wells' shares need only climb a couple of points to $53, and it will have earned an honorable distinction.

Wells Fargo is a tremendous post-financial crisis story, the shares rising over six-fold from a 2009 recession low ~$8.50 to as high as $52.63 last week.

Wells Fargo (WFC) -- Monthly Price and Volume 2009-to-date

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Main Street versus Wall Street
I've written a number of articles about Wells Fargo, and most all of them emphasize a key underpinning: Wells' success is centered around the banking strategy to serve Main Street versus Wall Street.

By this I mean the management of Wells Fargo has long held a simple banking business plan: this entails taking in customer deposits, then making sound mortgages and community loans.

Exotic I-bank business deals, far-flung international forays, financially engineering products, and other razzle-dazzle has never been part of the equation.

Comprehensive Capital Analysis and Review: Let the dividends roll
The 2008-09 financial crisis spurred the Federal government to pass legislation requiring the big banks to submit an annual capital plan for review and concurrence. It's called the Comprehensive Capital Analysis and Review, or CCAR for short. In conjunction with this overall review, the Feds must offer "no objection" to a banks' recommendation for shareholder return of capital plans. This means dividends and share repurchases.

Wells Fargo has never had a CCAR plan rejected, while returning increasing capital to shareholders; this year boosting the dividend to levels eclipsing even the 2007 pre-crisis payout.

From the June 10, 2014 Morgan Stanley Financials Conference, here's a quote from EVP / CFO John Shrewsberry:

With a 17% increase in dividend to $0.35 a share, people responded very favorably to that. And there – we have a lot of approved repurchased [shares] to go along with it. So I feel comfortable with where we are today....

Wells Fargo stock sports a 2.7% annualized yield. Last quarter marked the 12th consecutive quarter of record diluted EPS. The bank has targeted about 35% of its earnings for cash dividends.

Forward prospects
Banking management is relatively sanguine about the future. While clearly acknowledging the banking mortgage and refi business is slowing, the deep and experienced leadership points out this has been no surprise.

Therefore, Wells Fargo now emphasizes non-mortgage lending that dovetails nicely with a growing economy. The bank is #1 in auto loans, #1 in community business loans, and has a rapidly expanding credit card enterprise. In addition, bankers have long espoused "cross-selling," or a specifically encouraging existing customers to utilize multiple Wells Fargo products. For instance, a young customer with just a savings account may be asked if he/she may be interested in a Wells' credit card, CD, an auto loan, or a student loan as applicable.

On the expense side of the ledger, management has steered the company toward physically smaller banking branches, thereby retaining visibility, but reducing operating expenses.

Over the past 15 years, the normalized, average price/earnings ratio for Wells Fargo common shares have been a bit over 15. During the 2008-09 banking crisis, earnings fell and the multiple skyrocketed. However, since that time the P/E and earnings both began a steady climb to normal valuation and growth. This is called, "reversion to the mean."

Today, Wells Fargo sports trailing-twelve-month earnings of $4.02. A return to the historic 15x price/earnings ratio indicates a $60 stock. Furthermore, Street consensus EPS is projected to be $4.70 by 2016. I've held that these shares could reach $70 each within that time frame.

While some other large banking peers arm-wrestle the demons of endless Federal litigation, relentless regulatory scrutiny, and unhappy stakeholders; old-standby Wells Fargo just goes about its business. Stodgy, unremarkable, but highly profitable. A solid and growing dividend, along with a reliable business model offer a good future runway. And despite the outstanding capital appreciation these shares have seen, one can plausibly argue the stock remains undervalued.

Investors have a lot to be happy about. Just ask Wells Fargo & Co's biggest shareholders: Warren Buffett.

Buffett also just bought millions of shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable landslide of profits!


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