Wells Fargo (NYSE:WFC) posted its first quarterly loss since 2008 and cut its quarterly dividend by over 80.4% from 51 cents to 10 cents per share. However, Wells Fargo stock will survive this just fine. I suspect Wells Fargo will restore the dividend after the novel coronavirus recession ends.
Moreover, Wells Fargo shareholders should take comfort in one thing. Despite the huge $2.4 billion in net income losses that the company booked for the quarter, its tangible book value per share (TBVPS) fell just 3.1%.
For example, Well Fargo’s July 14 earnings release on page 17 shows TBVPS dropped $1.02 from $32.90 to $31.88. This means that Wells Fargo stock now trades below its TBVPS. As of July 24 when it closed at $26.26 it was at 82% of TBVPS.
Here is what that means. TBVPS is what the company is worth after all debts are paid off and all its intangible assets are written off as if they are worth nothing.
So assuming no other losses occur which would lower TBVPS in the future, there is an implied gain of 18 cents on every stock purchase cost. That represents a theoretical gain of 22% for investors in Wells Fargo stock at today’s price.
What Analysts Say About Wells Fargo
To say the least, analysts seem to be quite negative on the stock. Reuters quoted one analyst, David Hendler, from research firm Viola Risk Advisors, as saying there was nothing positive in the earnings release. He cited organizational and balance sheet issues.
Barron’s wrote about the $10 billion in expenses that the new CEO and new CFO will cut at the bank. In fact, they quoted analysts who say they see progress in the bank dealing with its fundamental issues.
The magazine quoted analystJohn Pancarl of Evercore ISI as saying, “the tide is turning on Wells fundamentals.” The analyst believes that the revenue headwinds will turn around for the company.
It Is Cheap Compared to Peers
Barron’s also pointed out that the price of 82% of TBVPS is very cheap compared to its peers. For example, JPMorgan Chase (NYSE:JPM) trades for 1.6 times its TBVPS and Bank of America (NYSE:BAC) trades at 1.2 times.
It seems Barron’s agrees with our view that Wells Fargo is cheap. Moreover, it is also cheap on a forward price-earnings basis.
For example, 24 analysts polled by Yahoo! Finance estimate on average that next year’s EPS will be $2.11. Seeking Alpha’s poll of 18 analysts have an average estimate of $2.12. That puts Wells Fargo stock on a forward P/E of just a little over 12.4 times earnings.
By the way, both of its peers are cheaper on a forward P/E basis. Bank of America and JPMorgan Chase both trade on a forward P/E basis of 11.3 times. Wells Fargo’s ratio is 12.4 ratio.
Moreover, both of these competitors have higher dividend yields than Wells Fargo stock. Twice as high. Wells Fargo stock has a 1.5% yield, whereas Bank of America has a 3.88% yield, and JPMorgan Chase has a 3.6% yield. But they have not cut their dividends.
However, I suspect that once the recession ends, in about a year, Wells Fargo will be able to restore its dividend. For example, at today’s price, that is a theoretical dividend yield of 7.8%. In other words, even if Wells Fargo only restored half the dividend, it will trade at the dividend yield of its two main peers.
What to Do With Wells Fargo Stock
I suspect that the stock could far a bit further. If it were to trade at its peers’ P/E ratio of 11.3 times, the stock would have to fall to $23.96. That would also increase its yield to 1.7%. To get to a yield of 3% Wells Fargo stock would have to fall to $13.
But I don’t think that will happen. For one, that would put the stock at just 41% of its TBVPS. There is almost no possibility of that happening as it would signal a depression level of earnings losses.
I suspect that investors are counting on the dividend getting restored within a year or so. Even if Wells Fargo doubled it to 80 cents per share annually and even though this is below its prior $2.04 rate, the yield would be 3%. I think that is what investors are counting on at this price.
Therefore, most patient value investors will wait for the stock to get a little cheaper. There are plenty of upset investors in Wells Fargo, especially with the dividend cut. The key is to take advantage of this weakness in the stock especially if you are a long-term investor.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.
