I feel strange writing this, but it may be time to buy Wells Fargo (NYSE:WFC) stock.
But, still. At the company’s Jan. 28 opening price of $47.51 per share, the 51 cent dividend yields 4.2%. The company has enough earnings to cover that twice over. The December quarter, a disaster by any measure, still covered the dividend with room to spare.
If you’re an income investor with a long-term view, Wells Fargo is looking interesting.
What Else Can Go Wrong?
That’s not to say things can’t go wrong.
For starters, the bank’s technology platform sucks. “We want to be a technology company,” new CEO Charles Scharf said upon leaving the top slot at Visa (NYSE:V) to take on his new job. But its current platform can’t even keep regulators happy, let alone compete with all the fintech players nipping at its heels.
Changing this is not going to be easy. KKR (NYSE:KKR) underestimated the challenge when it bought First Data for $29 billion back in 2007. After a full decade of investment, Fiserv (NASDAQ:FISV) took First Data off KKR’s hands for $22 billion last year.
Scharf can give his commitment to fix the problems, and he knows how important it is. Visa is worth $452 billion, more than twice Wells Fargo’s $196 billion market capitalization. As much as we talk about the power of money — and with $1.9 billion of assets Wells has plenty of it — value in banking today comes from technology.
Scharf knows that. It’s a hopeful sign.
It must be added that the legal problems are still not over. Just because Wells Fargo hired an outsider to run it doesn’t mean all is forgiven. After paying $4 billion in various penalties, the bank is still under 14 consent orders, including a restriction on raising new capital. The shares have fallen by 11.7% since the start of the year, which is three times as much as JPMorgan Chase (NYSE:JPM) has dropped.
Scharf must rebuild his executive team from scratch.
WFC Stock Is Cheap
The scandal has taken out any premium the bank once enjoyed over its rivals. The price-to-book ratio on Wells Fargo, which is the value of its assets set against the value of its stock, is now about 1.2. Citigroup (NYSE:C), the sickest of the big banks after the 2008 financial meltdown, now has a price to book ratio of 0.9. In the days before the scandal, Wells was worth 1.8 times its book value.
Despite everything, however, Wells Fargo remains very profitable. Before the fourth quarter the company had already booked almost $3.50 per share of earnings. The bank retained enough cache to get a wealth management team from UBS (NYSE:UBS) to switch over.
The Bottom Line
The problems at Wells Fargo will take time to clear up. It’s very possible that the shares may trade lower in the next several weeks. (Cramer is looking for a level of about $44 before jumping in).
Scharf has known JPM chief Jamie Dimon since the 1980s and is said to be his “go-to guy” when the great man needs advice. Despite the scandals, WFC stock has nearly doubled since Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett bought into it.
This is a quality company and you have time to make your move. You’re going to start with a yield of 4.2% if you invest today. Maybe you’ll miss the precise bottom but that yield should be good enough.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM.