A sad performance for this US Bank

WFC - Wells Fargo

Wells Fargo is a diversified financial services company providing banking, insurance, investments, mortgage, and consumer and commercial financial services to its clients.

Wells Fargo has $1.9 trillion in assets and offices in 42 countries. It operates from 5,500 retail bank branches and has more than 13,000 ATMs. Wells Fargo & Company ranked No. 26 on Fortune’s 2018 rankings of America’s largest corporations. It has a large presence in the U.S.

Wells Fargo is organized into three operating segments:

  • Community Banking (51% of 2018 revenues – financial products and services for consumers and small businesses)
  • Wholesale Banking (31% – financial solutions to businesses across the U.S. and globally)
  • Wealth and Investment Management (18% – personalized wealth management, investment and retirement products across U.S. based businesses).

Wells Fargo is an industry leader in providing a wide range of financial products and services under personal, small business and commercial categories through its unbeatable distribution systems both physical and digital and industry leading innovation.

Investment Data

Revenue Growth & Market Exposure

Starting in 1852 as a regional bank, the organization today serves the financial needs of one in every three U.S. households. With more than 165 years of existence, the bank has developed strong credit discipline which helps it to endure various credit cycles. Strong credibility also results in a loyal customer base.
A large and loyal customer base, diversified revenue structure, leading market share in key financial products and a large national distribution network are the company’s biggest strengths. It is highly unlikely that a client having multiple accounts with the bank will switch to another one.

Wells Fargo serves small businesses, corporate, and commercial customers. It provides deposit accounts, credit and debit cards, and loans, commercial real estate and asset-based lending, advisory, brokerage, and trust services, etc. to its clients. Its latest quarter result was marked by positive business momentum and strong customer activity. The bank witnessed a growth of 3% YoY in digital active customers of 29.8 million, reflecting the ease of its digital payment option.

Wells Fargo is undergoing branch consolidations to reduce redundancies without disturbing distribution and growth. The bank completed 300 branch consolidations in 2018 and sold 52 branches during the fourth quarter. It also continues to explore new opportunities for financial services companies and business acquisitions.

Though the company suffered in 2016 on account of the fake account scandal, it is now working aggressively to rebuild the customer trust. Wells Fargo is targeting to serve over 70 million customers in the future. 

Dividends

Wells Fargo has grown its dividend for eight straight years. It continued to pay a dividend even during the 1990 and 2001 recessions and was one of the two large banks to remain profitable during the financial crisis. Wells Fargo currently has a low payout ratio of 39% and a dividend growth of 7.3% CAGR over the last five years. The company last raised its dividend by 4.6%.

The bank returned a record $25.8 billion in capital to shareholders in 2018 through dividends and share repurchases, representing a 78% increase from 2017. Wells Fargos’ diversified and durable business model enables it to perform well through a variety of interest rate and economic cycles. Its focus on lending businesses and fee income results in predictable cash flows. 

Wells Fargo has grown its earnings per share at 2.9% per annum over the past five years and a low payout ratio of 39%. It expects to pay 55%-75% of its profits in the form of dividends and share repurchases. Shareholders could expect dividends to increase in the low single digit range.

Competition

Wells Fargo faces significant competition in the rapidly evolving financial services industry. An unparalleled physical distribution network sets it apart from its peers. JPMorgan Chase and Bank Of America are its leading competition.

Wells Fargo also competes with other large banks like Industrial and Commercial Bank of China and China Construction Bank. Wells Fargo has branches in more states and in twice the number of markets as its peers. The bank has a relatively smaller exposure to investment banking and trading operations when compared to its peers, which tend to be riskier businesses.

Bottom Line

Wells Fargo continually invests in new technology, infrastructure, cybersecurity and risk management. Large scale, distribution and ATM networks, and a growing digital presence are its competitive advantages. A low payout ratio also indicates there is room for future dividend growth.

With that said, a US bank that cannot beat the TSX is not much of a bank. That’s an official pass and the Canadian banks have more to offer in terms of growth and dividend income.

WFC vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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