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This Is Warren Buffett's Best-Performing Dividend Stock of 2021. Should You Buy It?

By Eric Volkman – Dec 7, 2021 at 7:35AM

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There are some serious concerns with this well-known company.

Through his investment conglomerate Berkshire Hathaway (BRK.A -0.13%) (BRK.B -0.24%), celebrated stock picker Warren Buffett has been a longtime shareholder of big bank (and habitual dividend payer) Wells Fargo (WFC -0.45%). While Berkshire has sold the great bulk of its once-mighty position in the bank over the past couple of years, it still holds over 675,000 Wells Fargo shares.

Other investors have been more interested in buying the stock lately and its price has risen by about 63.5% year to date. That recent rise beats not only the performance of the remaining Big Four banks (Bank of America (BAC -0.32%), JPMorgan Chase (JPM 0.47%), and Citigroup (C 0.37%)), but also that of every other dividend stock in Berkshire's portfolio.

Warren Buffett.

Image source: The Motley Fool.

Was Buffett and Berkshire wrong to sell? What's up with Wells Fargo and should you own shares of the big bank? Let's take a look.

Is all well with Wells Fargo?

Buffett tends to invest in companies that have deep and wide moats, and once upon a time, Wells Fargo appeared to possess one. The company was proud of its apparent unmatched success at cross-selling to its massive customer base, which continuously opened new avenues for the bank to draw revenue.

But all was not as it appeared to be. In a scandal that broke in 2016, it became apparent that many of these cross-sold products had been opened without the knowledge of the affected customers. Following this and other alleged malfeasance by the bank, the Federal Reserve imposed fines, sanctions, and set a $1.95 trillion asset cap on it in early 2018 in order to encourage changes in its operations and management. This sharply limited Wells Fargo's ability to grow its business.

Wells Fargo management did make changes to comply with government orders and still has more to complete. The bank has also benefitted from a frothy economy and an aggressive cost-cutting program. This has helped Wells Fargo lately improve some of its key metrics, despite the cap.

For instance, the bank's net profit in the third quarter zoomed almost 60% higher year over year, to over $5.1 billion. And this happened despite a 2% slide in revenue (forced by the asset cap!) to $18.8 billion and an 8% drop in loans. Both the top- and bottom-line results beat analyst estimates.

Rewinding to the two previous 2021 quarters, Wells Fargo recorded even more dramatic profitability improvements, and even a bit of revenue growth. And following a deep dividend cut it enacted in mid-2020, the company recently declared a sharp rise in the quarterly payout, doubling it to $0.20 per share this summer.

The Big Four boom

To be clear, Wells Fargo's improvements have come in a generally good period for banks. Yes, the coronavirus pandemic has hit them hard at times, but the U.S. economy continues to grow; therefore, banks remain generally on a growth path. Some of Wells Fargo's improvements have been dramatic, sure, but the other Big Four are also posting serious gains.

Witness JPMorgan Chase's Q3 included a 24% increase in net profit. That's impressive considering the size and reach JPM already has. In the same quarter, Bank of America -- currently Buffett's favorite bank stock based on Berkshire's huge position in it -- saw its bottom line expand by almost 60% (a similar rate to Wells Fargo). And unlike Wells Fargo, BofA's revenue rose (by an impressive 12%, to nearly $23 billion).

We should also consider that no other big bank is forced to operate with a strict asset cap that's is unlikely to be lifted soon. In September, Fed Chair Jerome Powell said bluntly that the cap is remaining firmly in place for now. Neither JPMorgan Chase, Bank of America, nor Citigroup is burdened with such a requirement.

Finally, with that slash to its payout last year, Wells Fargo really isn't a compelling dividend stock -- even in a narrow comparison within the typically miserly banking sector. Its relatively low distribution rate, combined with that stock-price appreciation, makes for a dividend yield of only 1.3%. Bank of America and JPMorgan Chase's respective 1.8% and 2.3% both top that, while Citigroup's current 3.3% is more than double Wells Fargo's rate.

Not out of the woods yet

Wells Fargo has generally played nice with regulators since the accounts scandal (and a few smaller ones that followed it). However, corporate cultures at big companies tend to take a long time to change. I'm not fully convinced that the bank has managed to clean out all the rot that infected its culture in the last decade.

Meanwhile, the asset cap remains a major burden (although management does deserve credit for being effective with its rationalization measures). The bank is basically forced to play defense and scramble for sources of profitability as its rivals grow their asset bases ever higher in a broadly favorable economic environment.

Personally, I wouldn't be a buyer of Wells Fargo shares. Which seems to jive with Buffett and Berkshire's thinking on the stock. Both within the finance sector and outside it, there are far more high-potential stocks on the market.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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