Warren Buffett Owns this Dividend Stock. Should You?
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When the Oracle of Omaha buys a stock investors take notice. Buffett has continually been adding to his position in Wells Fargo (NYSE: WFC) since he initially purchased shares in the early 1990’s. Today Berkshire Hathaway (NYSE: BRK-A) owns 411 million shares, making Well’s Fargo one of Buffett’s largest holdings.
So the greatest investor in the World clearly believes in the stock. But does that mean that you should too?
The Bullish Case
In 1852 Wells Fargo opened its doors and began its operations. Little did the owners know that 160 years later it would stand as one of the largest financial institutions in the World.
Today the company continues to expand. From 1970 till present the company has grown its earnings per share and book value by a compound annual growth rate (CAGR) of around 9%. Additionally the company pays a fairly substantial dividend of around 2.6%, which it has grown by a CAGR of around 6.3%. This isn’t bad; especially when one considers the recent financial debacle the World just went through.
Additionally as the largest holder of mortgages in the U.S., Wells Fargo will stand to benefit once housing starts to recover (which it inevitably will).
Finally the company trades at only 11.5 times trailing twelve month earnings, and 9.5 times forward looking earnings. This is cheap compared to the S&P’s current PE of 16.5.
The Bearish Case
While Wells Fargo may look cheap relative to the S&P, it is not necessarily cheap relative to other banks. JP Morgan (NYSE: JPM) for example trades for under 9 times earnings, and yields 3.1%. With shares beaten up from its two billion dollar trading mishap it is quite possible that JPM currently offers a better buy to investors than Wells Fargo.
Additionally bank stocks, and the market as a whole could take a nosedive if Europe begins to show more economic weakness. If the EU cannot figure out a way to sort out the mess they are in, then it is quite possible that we see another downturn in the global economy. This will have a negative effect on stocks in general and financial companies like Wells Fargo will see their share prices decline substantially.
Financial companies also have to worry about regulatory risk. With many elections coming up, as well as the current unpopularity of financial institutions, it is quite possible that politician’s will try to pass legislation that has a dampening effect on the profitability of banks. Fortunately for companies such as Wells Fargo the gridlock that currently exists in Washington will limit the amount of (potentially harmful) legislation that can be passed.
Buffett has stated in the past that he expects housing to pickup. Perhaps this is the reason why he is so bullish on Wells Fargo. Still there are many other stocks that he could have bought. Lowe’s Corp (NYSE: LOW) for example offers a nearly identical yield to WFC, has a much higher growth rate, and stands to benefit from a housing recovery also. Perhaps the thing that made Buffett interested in Wells Fargo over other housing plays such as Lowe’s was the company’s long and steady track record. Buffett likes to buy companies like Coca-Cola that will likely be around 100 years from now. With 160 years of history behind it, it will be very likely that WFC stays around for another 100 years.
Wells Fargo does have a few things to worry about, namely the problems that could arise out of Europe, but it is very unlikely that these things will take down the company given their conservative management and great track record.
The company has rewarded shareholders well over the years, and probably will continue to reward shareholders well in the years to come. It would be unwise for investors to bet against Buffett on Wells Fargo.
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kf9211 has no positions in the stocks mentioned above. The Motley Fool owns shares of JPMorgan Chase & Co. and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.