The U.S. economy continues to dig itself out of the hole caused by the 2008-2009 financial crisis and ensuing recession, the worst the country saw since the Great Depression. Slowly but surely, businesses and individuals are regaining confidence and banks are finally returning to more robust lending.
As the United States gradually emerges from the worst recession in many decades, it’s a good time to evaluate the nation’s banks. In particular, Wells Fargo & Co (NYSE:WFC) is one of the nation’s biggest financial institutions and counts Warren Buffett among its financial backers. Should you follow the lead of the world’s most famous investor and buy Wells Fargo?
Value, growth and income: the stock trifecta
Wells Fargo is often cited as one of the best bank stocks to buy in the financial media, and for good reason.
Wells Fargo & Co (NYSE:WFC) had a great first quarter, achieving record net income in what was a solid report. Revenue was roughly flat year over year, but diluted earnings per share rose 23% and the company expanded its return on average assets and return on equity ratios by 18 basis points and 145 basis points, respectively.
Wells Fargo isn’t the only banking giant in the United States firing on all cylinders. Industry juggernaut JPMorgan Chase & Co. (NYSE:JPM) is up 20% just since the start of the year. JPMorgan reported a fantastic first quarter of its own. First-quarter net income and earnings per share clocked in at record levels of $6.5 billion and $1.59 per share, respectively. This represented 33% growth in both metrics versus the first quarter last year.
Even though Wells Fargo & Co (NYSE:WFC) has rallied nearly 20% to begin 2013, there’s still value left. Wells Fargo trades for only 11 times trailing twelve-month earnings per share. Likewise for JPMorgan Chase & Co. (NYSE:JPM), which trades for less than 10 times trailing EPS. These valuation levels compare very favorably to the valuation on the broader market. The S&P 500 Index trades for a P/E multiple in the high teens.
Moreover, both these banks have begun to pay dividends again, after slashing their payouts down to pennies per share during the depths of the financial crisis. Impressively, Wells Fargo has raised its dividend in two consecutive quarters. The company yields 3% and its annual dividend payment is up 36% from its payout level one year ago. Moreover, the company repurchased approximately 17 million shares of its own stock during the first quarter.
One big bank to avoid
It goes without saying that there are still U.S. banks encountering difficulties in getting their financial houses in order. One such bank is Citigroup Inc (NYSE:C). Even though Citigroup has rallied alongside its peers to sit near its 52 week high, the bank’s level of shareholder friendliness still leaves a lot to be desired.
On the plus side, Citigroup reported a positive first-quarter in which net income jumped 30% to $3.81 billion, and its per-share profit of $1.29 widely beat estimates.
That being said, Citigroup Inc (NYSE:C) still offers just a token dividend payment of one cent per share quarterly. Moreover, Citigroup trades for a P/E multiple of 17 according to Yahoo Finance, a significantly higher valuation than both Wells Fargo & Co (NYSE:WFC) JPMorgan.
Bank on healthy returns going forward
SEC filings reveal that Warren Buffett’s Berkshire Hathaway purchased 18 million shares of Wells Fargo in the first quarter, bringing the total ownership stake to 458 million total shares. Clearly, the Oracle of Omaha believes in Wells Fargo’s future, and I’d tend to agree.
For that matter, I’d classify both Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) as best-of-breed banking giants in the United States for their compelling dividend growth, attractive valuations, and excellent underlying operating performance. Of course, not all banks are created equal, and because of its token dividend and higher P/E multiple, investors would be wise to avoid Citigroup Inc (NYSE:C) and instead consider better-performing rivals Wells Fargo and JPMorgan Chase & Co. (NYSE:JPM).
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo & Co (NYSE:WFC). The Motley Fool owns shares of Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM)., and Wells Fargo.
The article Is Wells Fargo a Good Stock to Buy? originally appeared on Fool.com.
Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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