Wells Fargo (NYSE:WFC) is the bank people love to hate, but whether investors should hate WFC stock is another question altogether.
Its decision to shutter personal lines of credit has sparked outrage.
]It’s heightened by the fact that “losing” a credit line can actually cut a consumer’s credit rating.
I had a Wells Fargo credit line pushed on me by a home repair vendor several years ago. I paid the loan but was unable to cancel the line. I suspect my case is typical. I understand and share the anger.
But the decision to cut the lines let the bank recapture $1.6 billion in loan loss reserves. On July 14, the bank announced earnings of $6 billion, $1.38/share, on revenue of $20.27 billion. Last year it had a loss.
Sometimes a bad bank makes for an interesting stock.
A Closer Look at WFC Stock
The case for buying WFC stock starts with Charles Scharf, who became CEO in October 2019.
Scharf had been running Visa (NYSE:V) and is an acolyte of JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon. He even wears his hair the same way. One of his early hires was Dimon’s son in law, Conor Tolken, who was quickly put in charge of fixing a broken corporate culture.
Wells had tried to “get past” its account fraud scandal by promoting Tim Sloan, an aide to former CEO John Stumpf.
Scharf represented a clean break, but his first year saw little progress. Scharf was running the San Francisco-based bank from his home on Long Island.
He put his foot firmly in his mouth on the question of diversity. During Scharf’s first year the price to book ratio, which under Stumpf had been the highest among the big banks, fell as low as .6. (It’s currently 1.08.)
Scharf was trying to clean out a mess during a pandemic. The mess was even bigger than he knew, thanks to years of cover-ups. One former manager recently compared it to “the mafia” in a British courtroom.
The New Wells
There was a $3.85 billion loss In last year’s June quarter. The big June quarter profit still has the bank’s price-to-earnings ratio at nearly 29.5. But if it can keep up its current earnings pace that would drop to 8 by next year.
Fatter earnings, and success with the Federal Reserve’s “stress tests,” mean WFC stock can double its dividend. That had been just 10 cents/share. It will now be 20 cents, bringing the yield back to 1.8%. The board also authorized up to $18 billion in stock buybacks over the next year, 10% of its current $178.6 billion market cap.
The new Wells is trying to win back consumers with a better cash-back credit card. It has no annual fee and a $200 bonus.
Wells is continuing the trend of moving branches out of big office buildings and onto plain storefronts. My branch is now in a former soup restaurant. Scharf is starting to rebuild the investment banking unit.
The Bottom Line
Smart investors have noticed the changes and believe in Scharf. Since the start of 2021 Wells stock is up 43%, nearly triple the jump in the S&P 500.
TV analyst Jim Cramer, who was burned by his devotion to Stumpf, has begun talking up the Wells turnaround story. Tipranks has it as a moderate buy, with none of the 18 analysts following it telling customers to sell.
I was way too early on this story. Just before the pandemic, and before it cut its dividend, I called Wells an “income investor’s dream.” That was a mistake.
I’ve called Scharf a “Dimon in the rough” but if you want diamonds, you buy diamonds. Wells’ comeback is already in the stock price. I’d rather have JPMorgan Chase, or even Bank of America (NYSE:BAC).
On the date of publication, Dana Blankenhorn held a LONG position in BAC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
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