My Favorite Bank Stock for 2013
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wall Street banks have endured several years of volatile results. After the 2008 financial crisis and the ensuing calamity that almost brought the nation’s entire financial system to its knees, America’s banks finally appear to be returning to regular profitability. However, to the dismay of bank stock investors, bank valuation multiples are still restrained. After a spate of financial reports from banks including Wells Fargo (NYSE: WFC), JPMorgan (NYSE: JPM), and Bank of America (NYSE: BAC), it appears that Wells Fargo is on the most solid footing of our nation’s biggest banks. As a result, Wells Fargo is my favorite bank stock for 2013.
Wells Fargo reported fourth-quarter and full-year financial results in early January. Wells Fargo seemed to provide solid results, reporting record fourth-quarter net income that handily beat earnings expectations. Full-year net income was up 19 percent year over year; earnings per share for the entire year came in at a record $3.36. Revenue for the fiscal year clocked in at over $86 billion, up 6 percent from the prior year. And yet, the stock stood still after the results. Consequently, the shares appear attractively priced at only 10 times fiscal 2012 earnings.
JPMorgan's and Bank of America’s Wild and Bumpy Rides
Last year, JPMorgan announced a huge $6.8 billion trading loss called the “London Whale.” The stock went from $46 in early April to $30 two months later. There was even media speculation of a cut to JPMorgan's dividend. Since then, the bank's shares have recovered back to the mid-forties. JPMorgan seems to be trading at a reasonable price-to-earnings ratio of 9.5, but the massive trading losses put a dent in the company's fourth quarter results and will surely hamper the company’s ability to increase its dividend in the future. The London Whale aside, the bank reported solid fourth quarter results: revenues rose 10% on the strength of a 33% increase in mortgage originations. Earnings per share of $1.40 handily beat estimates of $1.16. However, shares of JPMorgan didn't rally to the extent one would expect, and the bank still trades below book value.
Bank of America, meanwhile, has paid more than $50 billion in mortgage-related legal fees to settle disputes made against its subsidiary Countrywide, which it acquired just before the financial crisis. These settlements caused the bank's fourth quarter earnings to shrink to 3 cents per share. However, analyst expectations were for only 2 cents per share. Revenues fell by more than 25% from the year-ago period. Despite the earnings beat, Bank of America's shares are still at a fraction of what they were before the financial crisis. Bank of America has barely been profitable over the last year and its dividend is still a token payout.
Wells Fargo Stands Above the Rest
Even more positively for Wells Fargo, the bank raised its dividend in late January. The company increased its payout 16% and the raise reflects the company’s confidence in its performance as well as its commitment to returning cash to shareholders. At its current level of $1.00 per share, the dividend yields almost 3% at recent prices. Wells Fargo provides more stability and reliable financial results than its peers, and appears to be in a much better position to provide shareholders compelling returns going forward.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!