Many people will wonder if monster banks, such as Wells Fargo (NYSE: WFC), are still a value investment. Investors fear the economic and political chaos rocking America will destroy the monster banks.
Monster bankers are suffering. Stockrow estimates Wells Fargo & Company’s (NYSE: WFC) revenue growth rate fell by -19.65% in the quarter ending on 31 March 2020. Similarly, Bank of America’s (NYSE: BAC) revenue growth shrank by -7.17% in the same period.
Interestingly, that was the second quarter of revenue growth shrinkage for both monster banks. B of A’s of revenue growth fell by -3.12% in last quarter 2019. Likewise, Wells Fargo’s revenue growth shrank by -3.97% in the last three months of 2019.
Hence, the two monster banks’ revenue growth rates were shrinking before coronavirus. Now that revenue growth is collapsing rather than shrinking.
Are the Monster Banks Losing Money?
Wells Fargo still makes money but it makes less money. For instance, Wells Fargo’s quarterly operating income fell from $3.902 billion on 31 December 2019 to $664 million three months later.
In comparison, Bank of America’s; or B of A’s, quarterly operating income fell from $8.169 billion on New Year’s Eve 2019 to $4.531 billion on 31 March 2020. Hence, both big banks’ operating income is in free fall.
Furthermore, Bank of America’s quarterly gross profit rose from $22.349 billion at the end of 2019 to $22.767 billion three months later. Conversely, Wells Fargo’s quarterly gross profit fell from $19.86 billion on 31 December 2019 to $17.717 billion three months later.
Monster Banks’ Money Making Capacity Falls
In total, both giant banks still make enormous amounts of money. However, the monsters’ money making potential is falling.
For instance, Wells Fargo’s quarterly revenues fell from $24.255 billion on 31 December 2019 to $22.132 billion at the end of the next quarter. Additionally, Bank of America’s quarterly revenues fell from $27.125 billion on 31 December 2019 to $26.735 billion on 31 March 2020.
Consequently, I think the monster banks’ margin of safety is shrinking because they have less money and are capable of less growth. Hence, the monster banks’ could face problems if the coronavirus depression continues.
How much Cash Do Monster Banks Have?
The monster banks still generate enormous amounts of cash. For example, Bank of America reported a quarterly operating cash flow of $19.043 billion on 31 March 2020.
Moreover, BoA reported a quarterly financing cash flow of $161.147 billion and a quarterly ending cash flow of $250.390 billion on the same day. In contrast, Wells Fargo reported an operating cash flow of $17.273 billion; a financing cash flow of $36.589 billion, and an ending cash flow of $150.809 billion for the quarter ending on 31 March 2020.
Consequently, Wells Fargo had $317.699 billion in cash and short-term investments on March 31, 2020. Plus Bank of America, or BOA, had $757.965 billion in cash and short-term investments on the same day.
Are the Monster Banks a Good Business?
The gigantic amounts of cash at the monster banks interests tech companies. To explain, Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOG), Facebook (NASDAQ: FB), and Amazon (NASDAQ: AMZN) are all trying to enter the fintech or financial technology business to generate similar amounts of cash.
For example, Apple promotes Apple Pay which offers instant access to checking and credit card accounts. Similarly, Alphabet (NASDAQ: GOOGL) offers Google Pay, an Apple Pay clone. In addition, Amazon offers Amazon Pay.
Big Tech Leverages Monster Banks
The tech giants hope to generate enormous amounts of cash through finance services. They design Apple Pay, WhatsApp, Facebook Pay, and Google Pay, to offer the same payment services as checking accounts and credit cards.
To explain, you can use Apple Pay to pay for almost anything. In addition, Apple Pay is faster and easier to use than a check book or a credit card. All you need to do to pay with Apple Pay is touch an app.
However, Apple Pay leverages banks by offering fast access to FDIC-insured accounts. Plus, you can use Apple Pay and Google Pay to get cash from BOA and Wells Fargo automatic teller machines (ATMs).
On the positive side big tech could grow monster banks’ business through solutions such as Apple Pay. For instance, Bank of America claims 25% of its consumer banking sales came from digital products in fourth quarter 2019. Additionally, the number of Bank of America mobile users grew by 10% to 27.8 million in the same period.*
On the negative side, Apple, Alphabet, Facebook, Amazon, and PayPal (NASDAQ: PYPL) want to compete with banks.
Is Warren Buffett right about monster’s banks?
Thus, the monster banks’ business model is still good. To explain, monster banks still have high margins of safety and generate huge amounts of cash.
Therefore, Warren Buffett’s faith in monster banks is neither short-sighted nor insane. In fact, Berkshire Hathaway (NYSE: BRK.B) held 925 million shares of BAC and 323.2 million shares of WFC on 15 May 2020, Investors.com estimates. Significantly, Berkshire Hathaway also owns 245.2 million shares of Apple.
I think Warren Buffett owns Bank of America and Wells Fargo because these banks are cheap, cash-rich, and offer high margins of safety. Additionally, both B of A and Wells Fargo pay respectable dividends.
Are Wells Fargo and Bank of America good Stocks?
Notably, Wells Fargo (NYSE: WFC) lost over half its share value in the first half of 2020. In detail Mr. Market paid $53.75 for a share of Wells Fargo on 2 January 2020 and $25.70 for the same share on 29 June 2020.
Bank of America, in contrast, retained more of its value during the pandemic. Mr. Market paid $23.15 for a share of BOA on 26 June 2020. That price was down from $35.64 a share on 2 January 2020.
Therefore, Wells Fargo and Bank of America are cheaper but they are losing their margin of safety. In particular Wells Fargo and B of A have a heavy exposure to the American economy’s problems. For instance, Bank of America held $220 billion in consumer investment assets in 4th Quarter 2019.*
Are Monster Banks Good Dividend Stocks
However, I think the monster banks could be good for an ordinary person’s portfolio because of their dividends.
For instance, Bank of America shares paid an 18₵ quarterly dividend on 4 June 2020. That dividend grew from 15₵ on 6 June 2019. Overall, Dividend.com estimates BOA offered a forward dividend yield of 2.91% and a forward payment ratio of 47.4% on 26 June 2020.
Wells Fargo paid a 51₵ dividend on 7 May 2020. Plus, Dividend.com estimates Wells Fargo paid a $1.92 forward annualized dividend yield of $1.92 and a yield of 7.35% on 26 June 2020.
Therefore, monster banks are still good dividend and income stocks that ordinary people need to investigate. However, these companies are vulnerable to a coronavirus depression that could destroy them.
Buy the monster bank stocks if you want moneymaking stocks. However, be leery of Bank of America and Wells Fargo because these monster banks could collapse.