The Motley Fool's readers have spoken, and I have heeded your cries. After months of pointing out CEO gaffes and faux pas, I've decided to make it a weekly tradition to also point out corporate leaders who are putting the interests of shareholders and the public first and are generally deserving of praise from investors. For reference, here's my previous selection.
This week, we're going to step into relatively uncharted water in this series -- as we're usually deriding large money center bank CEOs -- by highlighting John Stumpf, CEO of Wells Fargo (NYSE:WFC).
Kudos to you, Mr. Stumpf
There are usually a handful or reasons why investors should be enamored with the banking sector and about a mile-high stack of reasons why money centers are on the "never ever touch again" list for some investors.
It's not hard to understand why investors share such distaste for the sector. Large banks like Bank of America (NYSE:BAC) and Citigroup (NYSE:C) were nearly wiped out when the credit quality of their mortgage portfolios collapsed during the credit crisis. It wasn't until the TARP bailouts were introduced and granted both banks a $45 billion lifeline that investors finally calmed down a bit. But by then, the damage was done, with both banks diluting shareholders to raise cash and still attempting to recover from their debacles.
Legacy mortgage risk, an extended period of low interest rates, and the prospect of more fines related to the financial crisis, also give investors plenty of reason to shy away from the sector as a whole.
E*TRADE Financial (NASDAQ:ETFC), for example, has been slowly shedding toxic mortgage assets for the better part of four years, yet ratings agency Moody's recently pointed out in its own debt assessment of the company that its legacy mortgage portfolio is the reason its profit potential is being held back.
Legacy fines and low interest rates continue to be a concern for all walks of the banking industry, from the hated Bank of America, to the better-performing JPMorgan Chase (NYSE:JPM). JPMorgan's results were held back in the fourth quarter by historically low lending rates, which make it difficult to encourage deposits and improve profitability. For Bank of America and JPMorgan, settlements regarding their role in the housing collapse continue to manifest and act as a constant cloud overhanging the entire sector.
So, why would anyone want to venture into this supposed value trap?
For one, while John Stumpf and Wells Fargo are far from perfect -- the bank has paid its fair share of mortgage-related fines as well -- Wells relies on traditional banking practices to drive profits. This means you aren't going to deal with London Whale-type billion-dollar hedging losses with Wells Fargo as you saw with JPMorgan Chase last year. Instead, Wells Fargo plans to grow its bottom line through healthy acquisitions and deposit and loan growth. What you get with a company that stays away from risky investment opportunities is a loyal customer base and consistent profits. Between 2001 and 2011, either Wells Fargo or Wachovia (which is now owned by Wells Fargo), was ranked as the most consumer-friendly bank.
Another factor to consider is just how healthy Wells Fargo is with regard to its ability to withstand economic downturns, and the massive pile of interest-generating loans and deposits within its portfolio. The Federal Reserve's stress test results, which were released last month, demonstrated that even under the worst scenario Wells Fargo's tier 1 common equity ratio wouldn't dip below 7%, which is well above the 5% required by the Federal Reserve. These results allowed Wells Fargo to get its new capital plan approved -- much to the delight of shareholders -- and demonstrates how incredibly profitable it can be even with interest rates at historic lows. Just imagine how profitable Wells Fargo will be in 2016 when rates do begin to rise!
A step above his peers
One of the most impressive aspects of Wells Fargo is that even when things were at their worst in the banking sector, it still turned in an annual profit. But, this isn't the only impressive aspect about this megabank. In fact, Wells Fargo's capital plan, its employee benefits, and the amount of community giving instilled in this company is truly what makes it great.
As I noted above, Wells Fargo's capital plan was accepted by the Federal Reserve due to its conservative operations and healthy cash balance. The plan will involve a whopping 83% dividend increase to $0.22 per quarter from $0.12 per quarter. It also plans to repurchase more shares than it did in the previous year, which reduces share count, boosts EPS (since there are fewer shares outstanding to divide profits into), and on paper, should boost shareholder value.
In terms of employee benefits, Wells Fargo offers the traditional 401(k) and paid time off that we're used to seeing from large banks, but it also kicks in the added benefits of tuition reimbursement up to $5,000 annually, scholarships for employees' children ranging from $1,000 to $3,000 annually, and adoption reimbursement up to $5,000. Wells Fargo is definitely a kid-friendly place!
Where Wells Fargo and CEO John Stumpf really deserve the spotlight is in the company's community giving. We often think of large banks as vulture-like corporate entities sent forth to suck the lifeblood out of every consumer when in actuality, Wells Fargo was the third-biggest aggregate donor, period, in 2010, just one year after the market bottomed. In 2010, Wells Fargo donated $219.1 million, primarily targeting projects involving home ownership and minority-owned small businesses.
Two thumbs up
Wells Fargo might be a "boring" bank, but its traditional business practices that focus it on securing deposits and making smart loans to homeowners and businesses have positioned it as one of, if not the, strongest banks in the U.S. Sporting a yield of 2.4% and the prospect of an improving housing market -- as well as the real possibility that rates will begin to rise in two or three years -- Wells Fargo's future couldn't be brighter thanks to the excellent leadership of John Stumpf. With that in mind, I give Mr. Stumpf my seal of approval in the form of two very enthusiastic thumbs up!