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The Most Important Thing to Know About Warren Buffett's Favorite Stock

By Patrick Morris - Feb 9, 2014 at 11:47AM

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Wells Fargo is often considered the best bank when compared to Citigroup, JPMorgan Chase, and Bank of America, but there is one very important thing to see that many may miss.

Source: Georgetown University.

Warren Buffett constantly reinforces his desire to invest in companies that produce reliable earnings and reinvest those earnings into a great core business -- essentially creating a money-merry-go-round. At Buffett's Berkshire Hathaway, its biggest stock holding, Wells Fargo (WFC 0.17%), is able to consistently deliver because of the relationships it has with customers.

Phenomenal returns
Wells Fargo just had another strong quarter, reporting a net income of $5.6 billion, the 16th quarter in a row it was able to grow its bottom-line earnings. In fact, in each earnings release since the third quarter of 2010, Wells Fargo has been able to top its previous record of net income.

A quick glance at the last 10 quarters of net income from its three biggest competitors, Citigroup, JPMorgan Chase and Bank of America, reveals just how dramatically different Wells Fargo has been in its ability to grow its net income:

Source: Company Investor Relations.

With his known desire to see companies that are continually able to add to their ability to earn money for shareholders, and Wells Fargo's own ability to not only earn it, but also return it to shareholders -- its stock price rose 33% in 2013, and its combined share repurchases and dividends also rose by 33% to $11.4 billion -- it is no surprise Buffett and Berkshire owns almost 9% of the bank's shares.

How do they do it?
How the bank constantly achieves these great results was revealed in CEO John Stumpf's opening remarks on the earnings call when he said:

By focusing on meeting our customers' financial needs, we achieved record cross-sell across the company, with Retail Banking cross-sell growing to 6.16 products per household, Wholesale Banking increasing to 7.1 products, and Wealth, Brokerage and Retirement cross-sell achieving 10.42 products.

Over the last two years, you can see the impressive ability of Wells Fargo to not simply add new customers, but actually deepen its relationships with existing ones through the cross-sale of its products:

Source: Company Investor Relations.

It is very important to see this extension of relationships is not simply limited to a customer who has a credit card and a checking account with the bank, but is even more evident in its Wholesale Banking business, which is ensuring it is able to meet the banking needs of the businesses it has relationships with. Those relationships are often the most profitable ones for the bank.

With the ease of ability to switch between banks increasing every day, it will be critical for banks to further extend and expand the relationships they have with customers, and Wells Fargo is clearly doing a phenomenal job of that.

There are countless reasons Wells Fargo has been one of the most successful and profitable banks emerging from the financial crisis, and one clear reason is its ability to develop lasting and expansive relationships with its customers, from the recent college graduate to the Fortune 500 company, and everyone in between. This reality is an easy thing to miss, but a critical thing to know.

Patrick Morris owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$122.59 (-0.84%) $-1.04
Citigroup Inc. Stock Quote
Citigroup Inc.
$53.76 (-0.78%) $0.42
Bank of America Corporation Stock Quote
Bank of America Corporation
$36.41 (-0.63%) $0.23
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$46.14 (0.17%) $0.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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