Wells Fargo & Co (NYSE:WFC) is Warren Buffett’s largest holding, and he first bought into the company in 1989. Buffett owns businesses with lengthy operating histories, durable competitive advantages, and excellent management teams, and Wells Fargo is no exception.
Warren Buffett even added to his stake in the company during the fourth quarter of 2015, making the stock an even more timely idea. While we don’t own many financial companies in our Top 20 Dividend Stocks portfolio, Wells Fargo is one we are fond of.
Despite the negative stigma attached to banks following the financial crisis, these companies are generally in great financial shape and appear relatively undervalued compared to the market. With a dividend yield greater than 3% and mid- to upper-single digit dividend growth potential, Wells Fargo is worth a closer look.
Overall, a total of 85 investors among those tracked by Insider Monkey (including Berkshire) held shares of Wells Fargo at the end of last year, having amassed positions worth $32.56 billion in aggregate. In this way, while the number of investors remained unchanged over the quarter, the aggregate value of their holdings went up from $30.86 billion and represented 11.70% of the company’s outstanding stock at the end of December. Other investors bullish on Wells Fargo include billionaire Ken Fisher’s Fisher Asset Management, Tom Gardner’s Gardner Russo & Gardner and Alex Snow’s Lansdowne Partners.
Business Overview
Wells Fargo was founded in 1852 and was the third-largest bank in the country as measured by assets at the end of 2015. Wells Fargo’s 90 different business lines collectively generated over $86 billion in revenue last year from a diversified mix of banking, insurance, investment, mortgage, and consumer and commercial finance services.
Unlike many big banks, Wells Fargo has little exposure to investment banking and trading operations. Instead, the business focuses on simple lending businesses (e.g. mortgages, auto loans, commercial financing) and fee income.
Wells Fargo’s revenue is split nearly equally between traditional loan-making (53% of revenue), which generates net interest income from a 50/50 mix of commercial and consumer loans, and noninterest income (47% of revenue) from brokerage advisory services, commissions, mortgage originations, card fees, deposit service charges, and more.
The company serves more than 70 million customers through its network of more than 8,600 store locations and 13,000 ATMs, as well as its website and mobile banking application.
Business Analysis
Banks primarily gather deposits and loan them out for interest income. As borrowers, consumers and businesses are most concerned with getting access to dependable financing at the lowest interest rate possible.
In other words, banks are largely commodity businesses, and the lowest cost operator usually survives the longest in commodity markets. As one of the biggest banks in the country, Wells Fargo has numerous cost advantages, which begin with its track record of gathering low-cost deposits from consumers and businesses that it can lend out at higher interest rates.
According to Wells Fargo’s annual reports, the company’s total deposits have grown from $3.7 billion in 1966 to $1.2 trillion in 2015, representing growth of 12.6% per year over that period. As seen below, Wells Fargo’s deposits have grown at a healthy high-single digit rate in recent years as well. The company has more retail deposits than any other bank in the country and is ranked third overall in total deposits.
Source: Wells Fargo Investor Presentation
Importantly, Wells Fargo funds most of the loans it issues with its deposits. The company was paying just 0.08% on its deposits as of the fourth quarter of 2015, and its total funding cost including all sources was only 0.25% in 2015.
