Wells Fargo & Company (WFC) is arguably the strongest bank in the financial sector. Wells Fargo had a great 2014, with its stock price increasing over 21% for the year — a 43% premium to the S&P 500’s return over the same period of only 12.4%.
In addition to the strong stock price appreciation, WFC stock currently offers a 2.7% dividend yield on a 32% payout with annualized dividend growth over the past three years of 55.4%, making WFC stock a darling of growth and income investors.
What Drove 2014 WFC Stock Performance?
With an increasingly strong economic climate, many banks did well into 2014, driven by lower loan losses and higher loan volumes. For banks that have investment banking and large asset management divisions, this strength has amplified. Wells Fargo isn’t like the other large money center banks. In fact, I would classify it more of a thrift model than a tradition bank. It’s your global, main-street bank.
I anticipate Wells Fargo ending fiscal 2014 strong by continuing the upwards revenue trend, higher loan and deposit growth, and better performing assets increase net interest margin. In addition, with an efficiency ratio below 60%, I anticipate that any increase growth in the top line will quickly make its way down to earnings without much trouble.
WFC Stock 2015 Outlook
Wells Fargo has ambitious goals for 2015. WFC wants to significantly increase its consumer credit card portfolio, expand its brokerage operations and increase its utilization of cross selling by increasing the number of Wells Fargo products per customer from six to eight.
Growth in these areas is an effort to offset lost growth within Wells Fargo’s mortgage operations. As rates have risen, the market for mortgages has declined and with increasing economic activity, home prices have also risen, crimping mortgage growth and stagnating Wells Fargo mortgage portfolio growth to less than 1%.
Is WFC Stock Overvalued?
Some Analysts think so. On January 5, Baird downgraded WFC stock from “outperform” to “neutral.” The analyst consensus stock price is $54.74 — a 4% premium to WFC stock’s current trading range. Wells Fargo has a price-to-earnings ratio (P/E) of 12.9, which is low compared to the S&P 500’s current P/E of about 18. But WFC has a flat forward P/E ratio, a 1.74 price-to-book ratio and a 2.07 price-to-tangible-book ratio.
Basically, it looks like analysts have already valued any earnings growth into the stock price, and the ability for WFC Stock to appreciate based on multiples is limited given its current valuation.
Bottom Line
With a steepening yield curve, lower unemployment and higher economic activity, Wells Fargo won’t have bad 2015, but it’s unlikely to have the kind of great year that it had in 2014.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
