Legendary investor Warren Buffett has been at the head of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) for decades, and the stocks he's chosen for his portfolio at the insurance giant have generally done quite well. Among Berkshire's holdings, bank behemoth Wells Fargo (NYSE:WFC) is prominently placed in the top three by value, and Buffett has an almost 9% stake in Wells.
Yet Wells Fargo has had a tough time bouncing back from problems lately. That's pushed its stock down to attractive levels, but it also raises concerns about its future. With plenty of other holdings other than Wells Fargo stock, Berkshire Hathaway is well diversified and has prospects well beyond the banking industry.
Let's look at how Wells Fargo and Berkshire Hathaway compare, with an eye toward deciding which one seems like a better buy right now.
Valuation and stock performance
Neither Berkshire Hathaway nor Wells Fargo has done particularly well for shareholders lately, but the Oracle of Omaha's company has been able to outperform slightly. Berkshire stock is up about 1% since March 2018, while Wells Fargo shares have lost about 6% of their value over the same time period.
In terms of valuation, it's very difficult to use traditional earnings-based valuations with these companies. Berkshire Hathaway now has to mark many of its investment positions to market every quarter and incorporate the changes in value into its earnings. That leads to extreme volatility that makes even annual numbers almost meaningless. At the same time, some tax-related issues have also had one-time impacts on earnings during 2018, and that doesn't always lead to accurate valuation multiples. Looking at future earnings estimates, Wells Fargo looks like by far the cheaper choice, with a forward earnings multiple of just 9, compared with Berkshire's 18.
Another way to compare financial institutions is by using book value, which has been a favorite of Buffett's for some time. Wells is now cheaper than Berkshire by this measure for the first time in a long while, with a price-to-book for the bank of 1.29. Berkshire isn't that much more expensive at 1.42 times book value, but the difference is enough to make Wells Fargo look like a winner in terms of valuation.
If you want to get a dividend, you have only one choice here. Wells Fargo has a healthy dividend yield of 3.7%, while Berkshire Hathaway doesn't pay a dividend at all.
Dividend investors have wanted Warren Buffett's company to pay dividends for a long time, but the Berkshire CEO doesn't have any real interest in doing so. Instead, Buffett prefers to hang onto his own capital and invest it within Berkshire, looking for promising opportunities that can exceed the returns that shareholders would be able to generate elsewhere. Even if Berkshire has excess capital at its disposal, Buffett has made it clear that he prefers buybacks over dividends.
Not only does Wells Fargo pay a dividend, but it's also delivered dividend growth in recent years since the financial crisis. The bank took the unusual step of making a 5% dividend hike in the first quarter of 2019, coming on the heels of a 10% increase last summer. That marked the 10th boost since 2011, and Wells Fargo has fully recovered from the dividend hit that it took in the late 2000s.
Anyone who needs dividend income has no choice here, as Wells Fargo is the only stock that will meet their needs. Investors shouldn't expect Berkshire Hathaway ever to pay a dividend.
Growth prospects and risks
Berkshire Hathaway and Wells Fargo face different conditions in their respective corners of the financial industry. Berkshire's wide-ranging operations give it exposure to areas of the economy that Wells Fargo doesn't have, and that can have a marked impact on their prospects.
From an operating perspective, Berkshire Hathaway is firing on all cylinders. In the fourth quarter of 2018, Berkshire's operating earnings soared more than 70% compared to the year-earlier quarter, with strength in the conglomerate's railroad, utility, and energy businesses helping to contribute a substantial portion of Berkshire's positive performance. Most of Berkshire's other wholly owned businesses in the industrial and consumer services space also did well, with the cut in corporate tax rates being particularly favorable. Berkshire's core insurance business didn't have a great quarter, with catastrophic events causing the company to suffer an underwriting loss for the period, but Buffett still managed to produce underwriting profits for the full 2018 year. Investors are still excited at the fact that Berkshire had more than $110 billion in cash and similar investments at the end of 2018, putting it in position to deploy capital whenever a promising opportunity arises.
Meanwhile, Wells Fargo still finds itself stuck in a swamp of controversy. After suffering through years of scandals ranging from employees who opened unauthorized customer accounts to pad sales figures, to bad behavior relating to mortgage and auto loans, the banking giant's latest incident involved a massive system outage in February that left customers unable to perform basic banking functions. Investors who've seen their share prices drop weren't happy with the news that CEO Tim Sloan got a $1 million boost to his compensation during 2018, either, and that might well have been the last straw that finally prompted the chief executive's departure on March 28. Wells Fargo has taken steps to change its culture, though, and even though the Federal Reserve has thus far maintained its growth ban on the bank, that hasn't yet prevented profits from rising. With the executive shakeup that many regulators and lawmakers had asked for finally happening, the company itself looks poised not only to survive but to thrive
Despite its scandals, Wells Fargo currently looks like enough of a value play to warrant serious consideration. With a healthy dividend yield and rising quarterly payouts, attractive valuations, and a plan to restore its growth, the bank might well be a more timely pick than Berkshire Hathaway's stalwart stock -- for those who are comfortable with the greater risk involved with Wells Fargo right now.