Wells Fargo Wants to Return Its Cake and Eat It, Too

Earlier this week, Wells Fargo (NYSE:WFC) CEO John Stumpf told Bloomberg Television that the San Francisco lender is set on repaying the government's $25 billion TARP investment soon without resorting to an extra share offering. That reminds me of General Electric (NYSE:GE) CEO Jeff Immelt's assurances in January that GE was committed to maintaining both its dividend and its triple-A credit rating (GE kept neither). Is Mr. Stumpf guilty of wanting to return his Treasury cake and eat it, too?

Laggard or leader?
The better-run institutions that received the first round of TARP investments -- including JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), and US Bancorp (NYSE:USB) -- have all repaid the government's funds by now. By that criteria, Wells Fargo is lumped in with two lower-quality peers Bank of America (NYSE:BAC) and Citigroup (NYSE:C). Nonetheless, Wells still trades at the upper end of sector valuations -- at least on the basis of price-to-book value and price-to-tangible book value:

The bottom line
Wells Fargo certainly has the capacity to earn its way out of the capital shortfall the government identified in its stress test -- over time. But with a current Tier 1 Capital ratio of 9.80%, it's only in the middle of the pack in terms of capital adequacy, so it's far from clear that the immediate repayment of TARP funds would elicit a positive reaction from investors. This proud firm may be better off biding its time in the company of the industry's "dunces" for now -- I expect its results will set it apart again over the next few years.

Wells Fargo is a high quality company. Morgan Housel has identified three other high-quality companies that are still cheap.