Buying a stock that will prosper for generations sounds great in theory, but the problem is figuring out which companies have what it takes to actually turn that dream into a reality. In my view, the most important factor in this kind of long-term success is the company's ability to consistently produce top tier managers.
And in that respect, it's very difficult to argue against Wells Fargo (WFC -1.04%) as a fantastic stock for the ultra long term. Over the past 30 years, Wells has consistently produced the top managers in the banking industry, and all indications are that that management culture will survive for many generations to come.
The "Godfather" of elite bank management today
Today, Wells is the largest U.S. bank by market cap, it's highly profitable, and it cruised through the financial crisis arguably better than any other institution in the western world.
Wells Fargo as been around for well over 150 years, but the bank's current success can largely be attributed to a single man, former chairman and CEO Carl Reichardt. Fellow Fool John Maxfield went so far as to coin Reichardt as "the Godfather of prudent banking."
In my experience as a bank analyst, the single most significant factor in banking success is efficiency. Efficient banks make more profit per dollar of revenue, yes, but they also tend to operate with stronger risk management and produce more consistent results.
Being efficient gives the bank just enough wiggle room to allocate capital to these essential, but far from glamorous tasks. If a bank isn't efficient, that bank is more likely to engage in high risk businesses with higher yields to reach target profitability; in essence, they take on higher risks to compensate for a poorly run operation. That excess risk is sure to backfire as soon as the economy cycles from expansion to recession.
Banks are complicated entities, but universal among all successful operations is a laser like focus on expense control, productivity, and mitigating risk. Under Reichardt's leadership, Wells Fargo embraced these tenants better than anyone else. Reichardt famously vetoed a Christmas tree at the bank's corporate offices because that tree wasn't customer facing, and was therefore a waste of money. If an expense didn't directly lead to better risk management or higher productivity, Reichardt simply cut it.
In the years that followed, the next generation of leaders at Wells Fargo took this foundation, and built upon it with great success. This chart sums up that success nicely:
Wells Fargo vs the S&P 500 since Jan. 1, 1975. WFC Total Return Price data by YCharts
A management culture like no other
Following in Reichardt's footsteps, a succession of leaders at Wells Fargo steered the bank in the exact same fashion. The bank successfully navigated the savings and loan crisis of the 1980s, the California real estate bubble of the early 1990s, the dot-com bubble, and the great recession.
Through the years Wells Fargo executives like Richard Kovacevich and current CEO John Stumpf became legendary names in banking circles. From 1993 to 2013, Wells Fargo had the most consistent efficiency ratio of any major U.S. bank. Its return on assets remains exemplary, and the bank has largely sidestepped the public relations nightmares of the financial crisis while other big banks have suffered major damage to their reputations.
All that success can be linked to the bank's strong leadership and culture. That culture has been built over the past 35 years and shows no signs of weakening anytime soon. The culture is so strong, in fact, that it's spilling over to other high performing institutions.
Consider U.S. Bancorp (USB -1.88%). This superregional bank is led by Richard Davis, a banker who was mentored by former Wells Fargo executive Jerry Grundhofer. On a trailing 12 month basis, U.S. Bancorp has produced an impressive 1.53% return on assets. That beats the similarly strong 1.44% reported by Wells. In typical Wells Fargo fashion, U.S. Bancorp produces those results with a ruthless focus on cost management, efficiency, and maximizing productivity.
History tends to repeat itself, and for Wells Fargo, that's a good thing
Stock investing tends to focus heavily on the numbers. We look at the top and bottom lines, and focus our energy on specialized ratios, growth rates, and return calculations.
That's all well and good, but it can cause us to overlook a more fundamental consideration. Businesses are just groups of people working toward a common, capitalistic goal. Buying a company's stock is not just an investment in the company's assets and future profits; it's an investment and vote of confidence in the management team today and in the future.
If you're looking for a company with exceptional management today and a high likelihood of producing future elite managers, your search should start with Wells Fargo.
