There are few banks in this country better than Wells Fargo (WFC 2.73%). It's doubled in size since the financial crisis and is making more money today than it ever has. What follows, in turn, are three reasons why you may want to ride this storied institution's stagecoach all the way to your own bank.
1. It makes tons of money
The main reason that you'd want to own shares in Wells Fargo, or any other company for that matter, is simple: it makes a lot of money. During the first nine months of 2012, it recorded over $13.8 billion in net income. That beats Wal-Mart (WMT -0.65%), Google (NASDAQ: GOOG), McDonald's (MCD 0.38%), and Ford (F 0.17%), and is nearly four times the amount recorded by Bank of America (BAC 1.53%), the nation's second largest bank by assets. On a per share basis, Wells Fargo's earnings translate into an impressive $3.18 over the last 12 months, equating to an entirely reasonable price-to-earnings ratio of 10.3.
Source: Capital IQ.
And things are bound to get better in 2013. Because it dominates the home lending market, as housing values continues to recover, which they're undoubtedly doing, Wells Fargo stands positioned to benefit from the trend. There's also every reason to believe that the bank will raise its dividend payout next year if given the go-ahead to do so by the Federal Reserve, which I believe it'll get in the first half of the year. Consequently, Wells Fargo won't only be making more money, it'll also be distributing a large amount to its shareholders.
2. It dominates the mortgage market
Wells Fargo is the nation's largest mortgage originator. In the first half of 2012, it underwrote one of every three mortgages in the United States. And in the third quarter alone, it originated a staggering $139 billion worth of home loans. As I've discussed previously, JPMorgan Chase (JPM 0.65%) came in second with $47 billion, an estimated 10% of the market, followed by US Bancorp (USB -0.20%) and B of A, each of which accounts for a relatively paltry 4.5% of the market.
The secret to this success is twofold. First, in the midst of the financial crisis, it more than doubled in size by acquiring Wachovia, then the nation's fourth-largest bank holding company -- Wells Fargo was actually smaller than Wachovia at the time. This move transformed Wells Fargo from a $622 billion bank to a $1.3 trillion operation and gave it an even larger domestic footprint through which to reach the masses.
Second, while Wells Fargo has been expanding its home lending operations over the last few years, other banks have scaled theirs' back. To name only the most significant, B of A closed its correspondent lending business at the end of 2011, wiping out nearly half of its mortgage origination volume. Not to mention, B of A had previously stopped buying loans from independent mortgage brokers roughly a year earlier.
Let me emphasize the scale of this opportunity. As I've noted before, there are roughly 70 million homes in America, fifty million of which are mortgaged, and the average mortgage is $200,000. The mortgage market, in turn, adds up to a staggering $10 trillion market.
3. Its dividend will grow
I'll be the first to admit that Wells Fargo's current 2.7% dividend yield leaves a lot to be desired. While it beats the broader market's 2.66% yield, as measured by the Dow Jones Industrial Average (^DJI 0.06%), it comes up short of many of its competitors, including JPMorgan's 2.9% and New York Community Bancorp's (NYCB -0.67%) 7.8%, among others.
But looking at it this way is too short-sighted. Prior to the financial crisis, Wells Fargo paid out anywhere between 35% and 50% of its net income to shareholders. Due to heightened capital requirements and regulatory oversight, however, it had to scale this back, and has only recently built it back up to 23% today. Consequently, assuming the Federal Reserve doesn't stop it from doing so, it seems highly likely that the bank will continue to ratchet up its quarterly dividend payouts. So far this year, it's paid out $0.60 per share in dividends. This is double what it paid out in the first three quarters of 2011 and triple the amount over the same time period of 2010.
So should you buy it?
The one downside to Wells Fargo's success is that its shares trade for a relatively dear 1.6 times tangible book value. If you were to heed the old saying in the banking industry to "buy at half of book value and sell at two," then clearly Wells Fargo's ship has already set sail. However, if you're looking less for immediate share price appreciation, and more for a rock-solid dividend stock, then this may very well be a candidate for your portfolio.
But before making that decision, I urge you to read our new in-depth report on Wells Fargo. It covers both the risks and the benefits associated with investing in this storied stock. To access this report instantly, simply click here now.
