Is Wells Fargo Now a Value Investment?

A lot of value investors are taking a closer look at Wells Fargo (NYSE: WFC) these days because it is a fundamentally sound company plagued by scandal.

Like a lot of investors I have been wondering do Wells Fargo’s efforts to clean up the fake account mess make it a value investor. The bank has a new CEO; Tim Sloan, and it is running TV ads promising to reimburse depositors for fake accounts. More importantly the same ads claim that the practices that led to the scandal; paying employees for opening accounts have been ended.

The scandal may have even made Wells Fargo stronger and more profitable because it is planning to eliminate 8,000 customer service positions. In other words the bank may emerge from the scandal as a better company, and might be a better investment in the future.

What did Warren Buffett Know?

Naturally many value investors will wonder if they should take advantage of the situation. After all Warren Buffett made at least part of his fortune by investing in scandal plagued company such as American Express (NYSE: AXP).

Cynics might wonder if Uncle Warren knew; or at least suspected, what was going on at Wells Fargo when he bought all that stock in the company. He realized the mess would hit the fan at some point and force changes that would make his investment more valuable.

Yet it also raises the question do we take a chance on Wells Fargo to clean up its act and fix the problems or dump it. There is an ethical dilemma here, an investor does not want to reward or profit from bad behavior, but we don’t want to penalize companies that try to do the right thing and take responsibility for their problems.

That is decision investors will have to make on their own, but we can find other answers by examining WFC’s financial numbers. Those show a pretty good company that is doing well in spite of the scandal.

Pedestrians walk in front of Wells Fargo & Co. headquarters in San Francisco, California, U.S., on Wednesday, March 14, 2012. Wells Fargo & Co. joined U.S. banks raising dividends and authorizing share repurchases after passing the Federal Reserve's test of how lenders would fare in an economic decline. Photographer: David Paul Morris/Bloomberg via Getty Images
Pedestrians walk in front of Wells Fargo & Co. headquarters in San Francisco, California, U.S., on Wednesday, March 14, 2012. Wells Fargo & Co. joined U.S. banks raising dividends and authorizing share repurchases after passing the Federal Reserve’s test of how lenders would fare in an economic decline. Photographer: David Paul Morris/Bloomberg via Getty Images

Wells Fargo’s Business is growing

The most interesting aspect of this situation is that Wells Fargo’s business is growing in spite of the scandal.

The company’s revenues grew by $450 million over third quarter 2016 and by $2.36 billion in the year that ended on September 30, 2016. Wells Fargo reported revenues of $85.91 billion in September 2015 that grew to $87.82 billion in June 2016 and $88.27 billion in September 2016.

That indicates a growing business that will be there after the scandal has cleared. Wells Fargo’s revenues are actually at their highest level yet.

Okay all is not perfect in Wells Fargo’s finances its net income of $22.24 billion was still lower than the $23.03 billion the company reported in September 2015. It also reported a negative free cash flow of -$7.366 billion on September 30.

Wells Fargo is making a Lot of Money

That may sound bad but Wells Fargo has the resources to survive that situation. On September 30, 2016, it reported the following financial numbers.

  • $1.942 trillion in assets.

161018163636-wells-fargo-san-francisco-780x439

  • $19.29 billion in cash and short-term investments.

 

  • $137.5 billion in cash from financing.

 

  • $11.84 billion in cash from operations.

 

Wells Fargo is generating a lot of float, although it is in a slightly precarious situation it also reported $1.739 trillion in liabilities on September 30, 2016.

Those numbers demonstrate that Wells Fargo’s underlying business is pretty sound. It is making a lot of money, and should be able to survive no matter happens with the false accounts scandal.

istock_000053393512_medium

Under good management it might be in a position for even more growth. Particularly if it can figure out ways to expand consumer banking without taking the risks that led to the scandal.

Wells Fargo is a Good Income Investment

This brings us to the most important question of all; is Wells Fargo a good basic investment? The answer I would say as I have before is yes, Wells Fargo is a good income and value investment.

Wells Fargo investors received a dividend yield of 3.34% and a dividend of 38¢ November 2, 2016. Those numbers and the 12.78% return on equity from September 30, 2016, justify Warren Buffett’s faith in this company. You will make money from its shares.

Those shares were also undervalued at $45.25 apiece on November 2, 2016. My suspicion is that value will increase with the general uptake in the U.S. financial industry. Making this a good time to buy Wells Fargo, barring any more nasty surprises from the bank’s consumer divisions it will be a good income stock for years to come.