Wells Fargo: Bland Is Beautiful

09/02/2015 7:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

Our latest recommended banking stocks—now the largest bank in the world by stock market value—has growth based on the old-fashioned strategy of expanding its deposit base and loan portfolio, observes Richard Moroney, editor of Dow Theory Forecasts.

Wells Fargo (WFC) has elected to keep its trading business fairly small, minimizing the effects of tougher regulations and higher capital requirements besieging other banks.

Wells Fargo’s total loan portfolio climbed 7% year-over-year to $888.5 billion at the end of June, with commercial loans up 12% and consumer loans 3%.

Among consumer loans, first mortgages rose 7%, automobiles 7%, and credit cards 14%; that growth was partly offset by a 10% decline in second mortgages.

Average deposits rose 8% in the June quarter. Net interest income rose 2% in the first half of 2015, helped by a larger loan portfolio and lower expenses.

Like many banks, Wells Fargo’s net interest margin has steadily declined over the past six years.

Higher interest rates should improve lending profitability if the bank can raise rates earned on its loans and investments at a faster pace than the rates it pays on deposits.

The consensus calls for per-share profits to rise 3% in the September quarter and 4% in the December quarter on 3% revenue growth in both periods.

If the environment for business lending and home mortgages remains favorable, Wells Fargo seems well positioned to top expectations.

The stock yields 2.6%, highest among S&P 500 diversified banks and well above the 1.8% average for S&P 500 financials. Over the past three years, Wells Fargo has grown its quarterly dividend at an annualized rate of 28%, ahead of its sector average of 22%.

At 14 times trailing earnings, the stock trades slightly below its 10-year average and the average for S&P 500 diversified banks.

An investment in Wells Fargo, the largest US home lender, requires confidence that interest rates will rise and the US economy will keep humming along.

We see both developments likely playing out over the next two to four years. As such, Wells Fargo is a Long-Term Buy.

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