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Wells Fargo Shareholders Should Keep Their Eyes on This

By John Maxfield - Jun 10, 2017 at 7:27AM

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The growth rate of Wells Fargo's book value per share reveals a lot about the bank.

While Wells Fargo (WFC 1.52%) has caught plenty of flak over the past year, following revelations that it had been opening fake customer accounts, over a longer stretch of time the California-based bank has been one of the top-performing companies in its space. Few metrics demonstrate this better than the growth in Wells Fargo's book value per share.

This figure has increased by 72% since the beginning of 2010. That ranks Wells Fargo fourth out of 23 banks on the KBW Bank Index, the average bank in which has seen its book value per share rise by an average of 47%.

WFC Book Value (Per Share) Chart

WFC Book Value (Per Share) data by YCharts.

One of the benefits of this metric is that it's simple to calculate. Just take Wells Fargo's shareholders' equity, which is at the bottom of its balance sheet, and divide that by the bank's outstanding share count. Then see how it changes over time.

There isn't a general rule that says how fast a bank's book value per share should grow in any given year. The rate will instead fluctuate depending on the stage of the business and interest rate cycles. If the economy is healthy and interest rates are high, a bank will earn more money and see its book value grow at a faster clip than if the economy is in a recession and interest rates are low.

The rate at which a bank's book value per share will increase is also influenced by the percentage of earnings it retains. A bank that retains the lion's share of its earnings should see its book value grow faster than a bank that distributes the majority of earnings to shareholders.

Given the present phase of the business and interest rate cycles, it's reasonable for investors to expect a bank's book value per share to grow by 5% a year. That's slightly higher than the average rate of growth on the KBW Bank Index over the past 12 months, but there are nevertheless plenty of banks that exceed this threshold. Historically speaking, Wells Fargo has almost always been among them, as is reflected in its 72% increase in less than eight years.

Wells Fargo branch sign.

Image source: The Motley Fool.

Wells Fargo's success in this regard is the result of strong fundamental performance, not an especially low total payout ratio (that is, the percentage of earnings distributed to shareholders through both dividends and buybacks). Over the past year, the nation's third biggest bank by assets has distributed 72% of its net income to shareholders, which is right in line with its peer-group average.

The bad news is that Wells Fargo has more recently started to lag its peers. Thanks presumably to fallout from its fake-account scandal, which erupted last September, its book value per share has increased only 3.1% since the first quarter of last year; this figure is below the 3.6% average on the KBW Bank Index for the same stretch.

Given that a bank's share price is heavily influenced by its book value per share, this is a metric that current and prospective investors in Wells Fargo will want to watch closely.

John Maxfield owns shares of Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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