Warren Buffett, through Berkshire Hathaway Inc. BRK.B, recently divested approximately all of its stake in his more than 31-year-old investment Wells Fargo (WFC). Per the regulatory filing, Berkshire owned just $26.4 million worth shares in the bank, as of Mar 31, 2021. This is markedly down from the nearly $32 billion holding in January 2018. Notably, Berkshire had spent at least $12.7 billion on the bank’s shares, building a 10% stake in 1989.
Nonetheless, Buffett continues to own shares of other banks, including The Bank of New York Mellon Corporation BK, U.S. Bancorp USB and Bank of America BAC.
While Buffett has slashed his stake in Wells Fargo, should you follow him? Let's check out the company's fundamentals before taking any investment decision.
Since the revelation of the unauthorized account openings scandal in late 2016, Wells Fargo has been involved in a number of probes, lawsuits and sanctions, including a cap imposed by the Federal Reserve on asset growth in early 2018. Further, issues have even cropped up in its auto-insurance business, online bill pay services, and in the Wealth and Investment Management segments. Also, last year, the bank entered into a $3-billion settlement with the authorities investigating its Community Bank sales practices.
Nonetheless, Wells Fargo has been diligently undertaking several remedial measures and initiatives. The bank has overhauled some operations post the close review of all its businesses after the scandal. Further, in the past few months, it has divested several non-core and less profitable businesses, including the Corporate Trust Services and asset management unit.
Earlier this year, Wells Fargo also received the Fed’s nod for its proposal for overhauling risk management and governance. The move is a step forward for the bank to get its asset growth limit removed. This, in return, has significantly boosted investors’ confidence in the stock.
Shares of Wells Fargo have surged 55.3%, year to date, outperforming the industry’s and the S&P 500’s rally of 33% and 10.4%, respectively.
Year-to-Date Price Performance
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Additionally, Wells Fargo continues to capitalize on its deposits base, which witnessed a five-year CAGR (2016-2020) of nearly 2%, with the trend continuing in the first three months of 2021. Notably, the company ranks third among the major Wall Street biggies in terms of deposits held.
Furthermore, Wells Fargo’s expense-management initiatives will keep supporting its financials. The company plans to lower its expense base to $53 billion this year through streamlining its organizational structure, closing branches (targets to close 250 branches in 2021) and trimming the headcount.
Despite the macro constraints, Wells Fargo’s credit quality is normalizing. Net charge-offs remained near a low level of 24 basis points as a percentage of average loans (annualized) as of Mar 31, 2021, reflecting the benefit of a diversified loan portfolio. Hence, with economic recovery gaining strength, credit quality is anticipated to improve further in the upcoming quarters.
Amid the pandemic-induced economic slowdown, last year, the central bank had restricted dividends and share repurchases by major banks in order to conserve liquidity. Thus, Wells Fargo reduced its dividend by 80% to 10 cents per share and did not resume buybacks till the end of December. Nonetheless, after the Fed's second round of stress test and subsequent approval, it resumed repurchases in first-quarter 2021 and raised its share-repurchase authorization by additional 500 million shares.
Moreover, this Zacks Rank #1 (Strong Buy) stock has been witnessing upward earnings estimate revisions, of late. Over the past 30 days, the Zacks Consensus Estimate for the same moved up 2.5% to $3.72 for 2021.You can see the complete list of today’s Zacks #1 Rank stocks here.
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U.S. Bancorp (USB): Free Stock Analysis Report
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Bank of America Corporation (BAC): Free Stock Analysis Report
The Bank of New York Mellon Corporation (BK): Free Stock Analysis Report
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