Is Warren Buffett right about Wells Fargo?

Warren Buffett is dumping one of his best known and most-controversial holdings. To explain, Berkshire Hathaway (NYSE: BRK.B) sold 21% of its stake in Wells Fargo & Co. (NYSE: WFC) during the second half of 2019.

In detail, Berkshire Hathaway (NYSE: BRK.A) sold 86 million shares of Well Fargo during the second half of 2019, Reuters estimates. Buffett has attracted a lot of criticism for his holdings in the much-hated monster bank.

Wells Fargo (NYSE: WFC) is controversial because the bank could pay $3 billion settle complaints and lawsuits arising from a fake accounts scandal, The Philadelphia Inquirer reports. To explain, critics allege Wells Fargo employees opened millions of fake accounts in customers’ names to collect bonuses.

In fact, the U.S. Office of the Comptroller for the Currency (OCC) U.S. Consumer Financial Protection Bureau fined Wells Fargo $1 billion for the fake accounts in 2018. Additionally, the OCC slapped former Wells Fargo CEO John Stumpf with a $17.5 fine and banned him from working in banking in January 2019, The Philadelphia Inquirer reports.

Consequently, Wells Fargo has serious management and ethical problems. Hence, Buffett could be smart to dump this stock.

Is Wells Fargo Making Money?

Oddly, Wells Fargo is making a lot of money. For instance, Wells Fargo reported a quarterly gross profit of $19.86 billion on quarterly revenues of $24.255 billion on 31 December 2019.

In the same quarter, Wells Fargo reported an operating income of $3.602 billion, and a common net income of $2.546 billion. Thus, Wells Fargo keeps making money despite all the complaints against the monster bank.

On the other hand, Wells Fargo reported a negative quarterly operating cash flow of -$12.975 billion on 30 September 2019. Thus, Wells Fargo lost money in the last quarter for which Stockrow offers data.  

Wells Fargo is a Cash-Rich Company

Importantly, Wells Fargo (NYSE: WFC) is a cash-rich company. Impressively Wells Fargo had $323.123 billion in cash and short-term investments and $1.3 trillion in total current assets on 31 December 2019.

Thus, Wells Fargo could pay the $3 billion lawsuit settlement from its accounts and still have $320.123 billion in cash. Additionally, Wells Fargo reported $1.927 trillion in total current assets.

Therefore, I consider Wells Fargo a cash-rich company and a value investment. In fact, I think Mr. Market underpriced Wells Fargo at $45.12 a share on 25 February 2020.

Why is Buffett selling Wells Fargo?

Buffett; on the other hand, could consider Wells Fargo overpriced. Thus, Berkshire is selling WFC shares at the high price to make money.

Moreover, Berkshire Hathaway could buy the Wells Fargo shares back at a lower price. In addition, Buffett thinks there are other lower priced assets out there. Notably, Buffett is buying some stocks including Kroger (NYSE: KR) and Biogen (NASDAQ: BIIB).

However, Berkshire Hathaway still holds 323.2 million Wells Fargo shares worth $17.4 billion, Reuters estimates. Hence, Wells Fargo is still Berkshire Hathaway’s third biggest holding.

Thus Buffett still believes in Wells Fargo, which indicates it could have a lot of value.

What Value Does Wells Fargo Have?

Wells Fargo (NYSE: WFC) is the most popular bank in 10 American states, Bankrate estimates.

Importantly, Wells Fargo is the most popular bank America’s three most populous states; California, Texas, and Florida, Bankrate claims. Those states had a combined population of 90.48 million in January 2020, the World Population Review estimates.

Thus, Wells Fargo is the most popular bank in three states that contain nearly one third of America’s population. To explain, Worldometer estimates America had a population of 331.003 million people in January 2020.

Wells Fargo operates around 5,000 U.S. branches in 2020, CNN Business estimates. However, Wells Fargo is closing around 800 branches. However, Wells Fargo’s website claims the company operated 5,400 U.S. branches in 2020.

Plus, Wells Fargo claims to operate 13,000 automatic teller machines (ATMs) that work with mobile payment apps such as Google Pay and Apple Pay. Wells Fargo also claims that 20 million people use its mobile payment solutions.

Consequently, Wells Fargo has a vast footprint that contributes to its value. Moreover, I think Wells Fargo’s footprint could be its main source of value.

Is Wells Fargo a Value Investment?

I think Wells Fargo (NYSE: WFC) a value investment because it was a company with $1.928 trillion in assets with a $45.12 a share stock on 25 February 2020.

Moreover, Wells Fargo’s ATM footprint adds a vast amount of value to the stock. To clarify, in 2020, most people use ATMs as their banks. For example, they use the ATM to get cash and deposit checks. If you are under 35 please Google the word check, because I do not want to explain checks to you.

Moreover, Wells Fargo paid a 51₵ quarterly dividend on 6 February 2020. Thus I consider WFC a decent dividend stock. Dividend.com estimates each Wells Fargo share offered a dividend yield of 4.31%, an annualized payout of $2.04, and a payout ratio of 49.61% on 25 February 2020.

If you are seeking a good cheap value stock that pays a respectable dividend you need to examine Wells Fargo. Even though Warren Buffett is selling Wells Fargo, this monster bank is still a value investment.