Wells Fargo: Stronger than its peers

The banking stock is an undervalued choice for conservative total-return investors.

By TheStockAdvisors Jun 12, 2013 11:30AM

Person withdrawing cash © Image Source/Image Source/Getty ImagesBy Philip Springer, Personal Finance


As the U.S. economy continues to recover from the financial crisis and recession, the housing market is now an aid to growth, not an impediment. The strength in housing is good news for the nation's largest mortgage lender, Wells Fargo & Co. (WFC).


Wells Fargo is one of the four largest banks in the U.S., after doubling in size from its 2008 acquisition of Wachovia Bank and sailing through the financial crisis mostly unscathed.


It enjoys numerous competitive advantages over its peers, including the ability to fund its assets at a much lower cost than the others; its strength at cross-selling products and services to customers; and consistently superior financial performance, including return on assets, return on equity and low loan write-offs.


In addition, this bank is well positioned to return more cash to shareholders in the years ahead. It recently announced a quarterly dividend hike from $0.25 to $0.30, resulting in a current yield of 3.1%.


Management also said it expects to increase the amount of this year's share buybacks from 2012's $3.9 billion.


The stock has enjoyed a good run in recent months. Nonetheless, it's hardly expensive, trading at only 10 times projected earnings for 2013. It's also at a moderate 1.25 times book value.


True, both measures are higher than those of Wells Fargo's peers, Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM). But with good reason: Wells has better management, stronger risk controls and a relatively straightforward business model that's also the most US-centric of the group.


It carries lower execution risk than the other banks. Wells also is better protected than its peers from both a) the impact of low net interest-rate margins caused by current Federal Reserve monetary policy and b) the risk and cost of continuing litigation from the financial crisis and mortgage mess.


Wells Fargo trades at a reasonable price, considering it's the strongest among its peers. This company is a conservative total-return investment on a gradual economic recovery. We recommend that you buy Wells Fargo up to $43, and we're adding it to the Growth Portfolio.


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