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Should we ride the Wells Fargo stagecoach?

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June 30, 2007 – Comments (0)

This week I want to take a look at Wells Fargo (WFC), the fourth largest bank in the US.  WFC is one of the core holdings in my IRA portfolio and I’m expecting the company to continue to increase dividends over the years to produce a nice income stream for retirement.  WFC offers retail and commercial banking, insurance and investment services.  As I write this, the company trades at a forward PE of 11.7, a slight premium to Citigroup, Bank of America, JP Morgan and Wachovia.  The dividend yield is 3.2% with a payout ratio of 43% and WFC has a very good track record of raising the dividend.  

   Some key strengths: 

The bank has a strong focus on cross selling products and services.  The easiest customer to market is one you’ve already got.

They are the only US bank with the highest credit rating from both Moody’s and S&P. 

As noted above, they have an excellent track record of raising the dividend and are likely to do so again with the next dividend announcement. 

They don’t make a lot of acquisitions, the ones they do make seem to be good fits and they don’t overpay. 

A few months ago, they rolled out brokerage accounts with 100 free trades for customers who had $25K of business with the bank and linked the account to a Wells Fargo checking account.  They may be giving away a bit too much, but should definitely see an increase in brokerage business and assets.  They'll also gain a new customer base for their other products and services. 

   Now for the concerns: 

WFC is the second largest mortgage originator in the country, not the best business to be in lately.  However, risk does seem to be well managed; WFC doesn’t write interest only, option ARM or negative amortization loans, they have PMI on all loans with LTV >80% and past due accounts and charge-offs were lower in Q1 2007 than Q1 2006.  source

The likelihood of a Fed easing has dropped substantially and there is a distinct possibility of higher interest rates or a Fed tightening going forward, not a good scenario for any financial company.

The CEO (Dick Kovacevich) recently announced he’s stepping down and has been replaced by the former COO, John Stumpf.  This was a planned succession and Mr. Stumpf has been the likely successor for some time.  Nonetheless, it’s always a concern when a very successful CEO steps down. 

If you’re looking for a stock that could make a bunch of points for the upcoming Foolish stock picking contest, WFC would be a poor choice.  If you’re looking for an investment that will be kicking out a nice income stream 10-20-30+ years down the road, this one’s worth a look.  Market concerns over the mortgage business and interest rate environment seem to be holding the price of WFC, along with other financials, down a bit and offering a good opportunity to accumulate.  And, it’s comforting knowing one of your fellow shareholders is Warren Buffett.

CAPS  Commentary

This was a bit of a rough week for my CAPS rating.  I made a bunch of gold ‘outperform’ picks and discovered that gold might not be done pulling back yet.  Didn’t take too big a hit on score, but took an accuracy hit.  Fortunately, I only bought a small position in Yamana for real – would have been even more fortunate if I had waited longer. 

I ended my outperform pick on American Railcar (ARII) to bank the points.  The stock seems stalled out, my best guess is it’ll bounce around awhile, then eventually head back up.  It was a nice run up over the past couple of months.  If it pulls back to the low-mid 30’s, I’ll probably re-up the pick and buy some. 

I’m considering ending my underperform picks on DR Horton and Brookfield Homes.  The business picture for homebuilders is still pretty glum, but by now most of that should be in the prices.

On a positive note, I picked up the ‘Most Helpful Pitcher’ charm.  Many thanks for the recommendations and my humble apologies if anyone followed my ill-timed gold picks or the AOB thumbs-down. 

As always, your comments are welcome.  Thanks for reading and have a great week.

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