Wells Fargo & Co (WFC) Remains Attractive

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Wells Fargo & Co (NYSE:WFC) is considered as one of the best performing financial institutions braving all the bad times in the past to remain solid. Though there were fluctuating reports or opinions about the financial institutions current position or the stocks price, it did not affect the company in any big way. That was mainly because of the strength of its balance sheet and the consistency with which it has been performing over the years. The recent drop in oil price also alarmed investors about investing in banking stocks due to their exposure. However, the banks have pointed out that the exposure to the oil sector is only minimal if one considered the loss inflicted by the financial crisis. Its dividend is liked by billionaire investor and investment guru, Warren Buffett. It is one of the few stocks that always remained attractive.

CPI Accelerates

If Wells Fargo & Co (NYSE:WFC) or any other banking stocks to grow, interest rate hike is primary. It is one of the factors that are affecting the growth as the low-interest rate has been in existence for a long time currently. In the absence of rate hikes, these banks have to look for avenues to cut down their expenditures and focus on fee-based income, which would not be liked by the customers. However, that might change in the upcoming months. There are enough indications that the interest rate hike is round the corner like the American economy performing well though concerns remain on the future strength.

Wells Fargo & Co (NYSE:WFC) expects the recent CPI acceleration to force the Federal Reserve to take a call on the Interest rates next month. For instance, in April, the CPI increased 0.4%, which was more than estimated level, since it was only 0.1% in March. That also showed that consumer was spending and not remaining tight. Some analysts expected a rate hike in March itself, but the uncertainty in the rest of the world made the Central Bank to hold it. There are few more economic indicators like the food at home index and food at away from home index growing 0.1% and 0.2% respectively. Also, the biggest gainer was the energy index that advanced 3.4% as retail gasoline prices grew 8.1%. These factors make the call for interest rate hike wider and some economists expect the rate hike to happen in June while others believe September.

Consumer Spending and Housing Remain Strong

There are at least two areas that should do well for Wells Fargo & Co (NYSE:WFC) or any banks, i.e. consumer lending and home lending. These areas can be considered as strength for the company also. For instance, in the first quarter, Credit Card Purchase volume was $17.5 billion, which was 8% lower than the fourth quarter due to the holiday season factor. However, on a YOY basis, it was up 13%. Similarly, consumer auto originations witnessed 2% growth on Q-o-Q and 9% on a YOY basis. That suggested that the consumer spending remained strong to drive the economy and boosting the changes of another interest rate hike.

Similarly, Wells Fargo & Co (NYSE:WFC) will look to gain from the housing market scenario, which remained strong. For instance, Housing starts increased in April, recovering most of the declines witnessed in March. Though the monthly starts numbers could be volatile, homebuilding has clearly had a bright start to the current year. The company’s Total starts have grown 10.2 percent on a year-to-date basis whereas permits rose in April but are running modestly below starts. That suggested that starts were likely to remain close to their current pace and is not likely to break out. Its application pipeline also remained strong.

Solid Dividend

One of the top dividend stocks for the investment Guru is Wells Fargo & Co (NYSE:WFC). That is primarily because of the trust in the company and the consistency in its performance despite challenging conditions. It pays a dividend of $1.52 a share on an annualized basis. Also, the dividend provided a yield of 3.10 percent at a time when the interest rates are ruling low. The current yield is also better than the five-year average yield of 2.6%. Though the company has been paying a dividend since 1939, the financial crisis has hurt the quantum of dividend payment. Every financial institution had to reduce the dividend rate during that time.

Wells Fargo & Co (NYSE:WFC) was also no exception. As a result, there was a break in continuing increase in dividend rate. However, the company is back in increasing the dividend pace in the last five years. Its growth rate is 38.29% for the average five-year period and for the three-year, it was 15.29%. The interesting fact is that its dividend payout ratio is only 37.0% though it was better than the five-year average payout ratio of 31.0%. That meant there is enough room for boosting the dividend rate in the upcoming years subject to the availability of more profit, which could come from increased lending.

There are also other factors like cost control and the efforts to enhance the free cash flow in the upcoming years to boost the valuation of the bank.

Conclusion

Wells Fargo & Co (NYSE:WFC) shares should be in anyone’s portfolio primarily because of its consistent performance. The first quarter results suggested that the economy is not as bad as feared or thought it to be. Most of the big banks delivered above the expectations results only. That indicated that the economy was strong. Also, that should pave the way for an interest rate hike in June rather than September. Aside from that, its dividend also offered a solid yield and growth making the investors to invest for dividend sake alone. There is an overall weakness as far as the financial stocks were concerned. That is why the stocks were not demonstrating their true value.

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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