3 Reasons Why Investors Should Invest In Wells Fargo & Co (WFC)

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Wells Fargo & Co (NYSE:WFC) has earned a name for itself on several metrics. The bank is regarded as a customer-centric one with integrity and treated as the ‘best of breed’ in the financial institution segment. Though Fed Stress Tests hasveimpacted the dividend payout since 2008, there are possibilities that the coming years would see the easing of them. Even for those who don’t depend on the bank’s dividend, the stock provided an excellent opportunity to buy for long-term basis and forget to hold such a blue chip stock. There are, at least, three reasons that investors should consider before buying the shares of the firm.

Biggest Low-Cost Deposit Base

One of the biggest advantages that Wells Fargo & Co (NYSE:WFC) has been the largest base of low-cost deposit among the four top banks. That was also a reason the company has been a dominant force in the money center with more than $1.1 trillion assets under its management. The bank has also been consistent in attracting a good volume of on-demand deposits in the big metropolitan markets. Also, more than three-fourths of its deposits come from small retail investors as the bank believes that such investors have the less tendency of switching. Its widespread presence enables it to attract the deposits as the bank was one of the very few to escape the financial crisis unhurt.

Risk factor is another thing that every customer attaches importance. Wells Fargo & Co (NYSE:WFC) has earned a name for itself as a conservative risk manager as the financial crisis heightened the fears of the depositors. For its part, the bank did well to avoid any big mortgage losses during the crisis whereas its rivals had to face a lot of them to reflect losses on their balance sheet even in the calendar year 2015. Its book value per share has been steadily witnessing a growth irrespective of the impact of the crisis. Another factor was that the company managed to keep its charge-offs below the 3% level even during the crisis.

Track Record Of Returns

The financial crisis brought down the dividend rate drastically of Wells Fargo & Co (NYSE:WFC) to five cents a quarter in the second quarter of the year 2009 from 34 cents in the preceding quarter. For two years, the bank did not have any alternative but to maintain the same dividend rate as the regulators were in full swing to put a strong system in place. However, the company boosted its dividend to 12 cents a share in 2011 and 22 cents a share in the following year. The successive years have also witnessed a growth in the dividend rate to 30 cents a share, 35 cents a share and 37.5 cents a share.

On average, Wells Fargo & Co (NYSE:WFC) boosted its dividend rate by 56.13% in the last five-year period. The last three year also witnessed a growth pace of 19.11% on average. The dividend yield is also better at 2.8%, which was higher than the 2.4% recorded on average during the last five-year period. Significantly, the bank increased its dividend payout ratio to 36.0% in the latest quarter. That was also higher than the five-year average payout ratio of 28.0%. The company, which has been paying a dividend since 1939, has increased its dividend rate for five straight years. History suggests that the company can manage a dividend payout ratio of 45%. Therefore, there is enough room to boost the dividend rate.

According to a calculation in the media, a sum of $10,000 invested in the company in the early 1970s is worth nearly $3 million currently. That translated into a return of nearly mid-teens percentage growth on an annualized basis. Its dividend also recorded 11% over the last two and half decade period. The return on equity was 12.62% in the third quarter.

Net Interest Margin

Wells Fargo & Co (NYSE:WFC) has enjoyed a net interest margin of 4.8% before the financial crisis struck the United States. That slipped to 3.1% in the year 2014 and 2.96% in the third quarter of the calendar year 2015. That was ten basis points weaker than the preceding year quarter. However, the company was able to maintain the NIM sequentially. NIM is nothing but the difference between the cost of borrowing and the money lent to the customers. The zero interest regulation has been kept for a long time to stimulate meaningful economic growth that can be sustained even if there is interest hike.

For the first time in a decade, the Federal Reserve has increased the key interest rates by 25 basis points. That means Wells Fargo & Co (NYSE:WFC) can lend at a primary lending rate of 3.5%. In the current year, the Central Bank is predicted to boost interest rates by another 75 basis points in three trenches in the year 2016. That might take the lending rate to 4.25% before the current year ends. While it might take some more time to reach the pre-crisis NIM level of 4.8%, the company might be able to achieve near the 3.5% level before the current year ends. The company could generate $12 billion additionally if NIM reaches the 4% level, which might not be possible in the current year.

Conclusion

There are three primary reasons for investors to look at Wells Fargo & Co (NYSE:WFC) for considering investments. One is its low-cost deposit base, the second is the return on investments, as well as, the dividend, and the third is the favorable impact due to the interest rate hike. Aside from that, there is less risk factor as it was one of the best-managed banks. Therefore, one can consider it for a long-term basis.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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