According to recent SEC filings, the chairman of Wells Fargo & Co (WFC), Richard M. Kovacevich, bought 40,398 shares of common stock on Friday at $26.05/share, or $1,052,367 total. This is interesting to note since WFC is Warren Buffet’s favorite bank stock, and one of his favorite stocks in general. It is also one of the largest stock holdings of Berkshire Hathaway.
Wells Fargo’s stock has declined heavily since the credit crunch began. However when we look at the numbers and do the valuation we can see why Warren Buffet has been purchasing more Wells Fargo shares, and quite possibly will purchase even more. Should you continue to add more WFC share to your portfolio?
Without going into an in depth valuation or calculating the intrinsic value, lets keep things short for this article and take a quick look at a few metrics using numbers from Reuters and Morningstar:
Average EBT (pretax) Margins for the last 10 years = 32%
– Consistent performance and ability in sustaining high margins over a long period of time.
Return on Equity (ROE) TTM = 16.60%
[Industry’s ROE = 8.9%, Sector’s ROE = 9.8%]
Return on Equity (ROE) over last 10 years = 17.54%
Dividend yield (at $26 a share) = 4.77%
Total dividend increase over the last 10 years = 254%
Annualized dividend increases over the last 10 years = 9.78%
– Continued dividends well over 20 years!
Total book value increase over last 10 years = 326%
Annualized book value increase over last 10 years = 12.55%
As Buffet has told his shareholders, increases in book value for banks is a pretty accurate gauge of increase in the bank’s intrinsic value!
P/E (TTM) = 10.9
P/E avg in last 10 years = 17.7
Lowest P/E in last 10 years excluding current P/E = 11.4 in 2007 [14.0 in 2005]
WFC has lost very little percentage-wise to its size, in the credit turmoil with its prudent management and investment decisions. It continues to be a profitable bank (especially at times when others have declared writedown after writedown, dividend cuts, and losses among other things).
When we compare WFC to many other Canadian and US banks, we can see it is far superior. Many other banks have done well in the short term right up to the housing bust. But over the last 10 years none match WFC, other than perhaps USB (another Warren Buffet favorite) which also have impressive numbers and resilience during these times!
We’ll never really know exactly why Buffet purchases more shares of WFC, but from his principles and what we know about him we can see many reasons. But after doing some valuation calculations and a full analysis of the intrinsic value, we easily see when and potentially why (cheap!) Buffet would buy more shares.
Below is the SEC filing related to the stock purchase by the WFC chairman:
I suggest reading Warren Buffet’s teacher/mentor Benjamin Graham’s classic book The Intelligent Investor, in order to learn more on value investing techniques and principles.
I have placed a link to the specific version/edition that I recommend. There are a few editions out, but this one has the Introduction and Appendix written by Warren Buffet (informative extras). Chapters/Indigo is sold out at the moment but I added a link to the audiobook. However, I find having it in textual format is better for referencing. This book is a must read for followers of Warren Buffet, and the best investment book I ever read.
Thanks & Happy Investing!
The Investment Blogger!
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