Why Wells Fargo & Co (WFC) Is Worth Owning

The next selection for the Inflation-Protected Income Growth Portfolio is banking titan Wells Fargo & Co (NYSE:WFC). One of the few major banks to have recovered its dividend to nearly its pre-financial-crisis level, and one that even noted value hunter Warren Buffett is willing to buy, Wells Fargo & Co (NYSE:WFC) stands out for its strength.

It’s true that the financial crisis did force Wells Fargo & Co (NYSE:WFC) to cut its dividend, but that was due in large part to its acquisition of troubled bank Wachovia amid that crisis. The company’s relatively quick recovery suggests that the blow was painful, but not fatal. So long as the company learned from that experience and stays away from buying severely troubled assets, it should be well positioned for the future.

Why it’s worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.

Dividends:

• Payment: The company’s dividend currently sits at $1.20 a share, a yield of about 3% based on Thursday’s closing price.
• Growth history: The company was one of the fastest major banks to significantly begin rebuilding its dividend after the financial crisis, with increases resuming in March 2011. Contrast that with Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC), neither of which have been able to take their dividends back above $0.01 yet, and Wells Fargo & Co (NYSE:WFC)’s strength becomes very clear.
• Reason to believe the growth can continue: With a payout ratio of around 28%, the company retains nearly three-quarters of its earnings to invest for future growth. That reasonable payout ratio is comforting given the banking crisis we just lived through and also gives the company flexibility to maintain its dividend if future growth doesn’t materialize as quickly as hoped.

Balance sheet and valuation:

Balance sheet: A debt-to-equity ratio of around 1.2 indicates that the company does use debt, but it hasn’t overleveraged itself to the point where a near-term financial hiccup would derail it. Indeed, for an industry that often relies on leverage to juice returns, that level looks remarkably reasonable.

Valuation: By a discounted earnings analysis that uses a 15% discount rate, the company looks to be worth around $226 billion. That makes its recent market cap of $212 billion seem reasonable.