Wells Fargo is accumulating lots of cash. Indeed, Wells Fargo’s (NYSE: WFC) ability to accumulate cash explains Warren Buffett’s faith in the megabank.
For example, Wells Fargo had $173.287 billion in cash and equivalents on December 31, 2018. Additionally, Wells Fargo records an operating cash flow of $15.034 billion, a financing cash flow of $16.975 billion, and a free cash flow of $15.034 billion 31 December 2018.
Consequently, Wells Fargo (NYSE: WFC) is Berkshire Hathaway’s (NYSE: BRK.B) fifth biggest stock holding. In fact Berkshire Hathaway (NYSE: BRK.B) owned 9.8% of WellsFargo worth $1.263 billion, according to Buffett’s 2018 Shareholder Letter. Moreover, those shares generated $809 million in dividends for Berkshire Hathaway.
Wells Fargo is accumulating lots of Cash so Warren Buffet buys it
Buffett maintains his stake in the megabank because Wells Fargo is accumulating lots of cash. Indeed, the cash is why Buffett owns Wells Fargo despite its many problems.
For example, Wells Fargo records a gross profit of $20.459 billion for 4th Quarter 2018 despite a negative revenue growth rate of -4.3%. Notably, both the gross profit and revenues at WFC fell during 4th Quarter.
In detail, Wells Fargo reports revenues of $21.361 billion and a gross profit of $21.361 billion for 3rd Quarter 2018. However, both numbers fell to $20.459 billion in 4th Quarter 2018.
Wells Fargo is accumulating lots of cash in a bad quarter
Hence, Wells Fargo can rake in a lot of cash even when it has a bad quarter. Thus, Wells Fargo is apparently one of those companies your idiot nephew can run.
“If you’ve got a good enough business, if you have a monopoly newspaper, if you have a network television station — I’m talking of the past — you know, your idiot nephew could run it,” Warren Buffett in May 2010.
Notably, Buffett made that comment to the Financial Crisis Inquiry Commission (FCIC), Business Insider reports. Importantly, the FCIC was investigating the causes of the Great Economic Meltdown of 2008.
Wells Fargo has a kind of Monopoly
Wells Fargo meets the idiot nephew criteria because it has a near monopoly on certain kinds of banking in some areas.
Notably Wells Fargo operates over 5,000 branches in the United States despite plans to close 800 branches by 2020, CNN Business estimates. In addition, Wells Fargo operates 13,000 card-free Automatic Teller Machines (ATMs).
Under these circumstances, Wells Fargo is the only place to get cash in many areas. For instance, Wells Fargo operates the only card-free ATMS that allow people to get cash with near-field communications (NFC) apps like Apple Pay and Google Pay in some places.
Therefore, many people have a strong incentive to open or keep Wells Fargo accounts. For instance, Wells Fargo ATMs are the only place to deposit checks in some neighborhoods. In particular, other banks lack the resources to match Wells Fargo’s footprint and ATM network.
Wells Fargo meets Buffett’s Idiot Nephew Test
Buffett believes a good business is one that makes a lot of money even if an idiotic person is running it. News from recent years demonstrate Wells Fargo meets Uncle Warren’s criteria.
For example, in August 2018, Wells Fargo paid a $2.09 billion fine because the bank issued mortgage loans based on what executive knew was incorrect information. Therefore, Wells Fargo executives behaved very stupidly but the company made money.
Moreover, the $2.09 billion fine is less than 1.5% of the cash Wells Fargo has on hand. To explain, the fine is $2.09 billion, CNN Business reports, yet Wells Fargo had $173.287 billion in cash on hand on December 31, 2018. Consequently, Wells Fargo could pay dozens of such fines and still pay a nice dividend.
Under these circumstances, Wells Fargo’s size makes it a value investment. To explain, the size protects the monster bank from the greed and incompetence of some of its employees. Effectively, Wells Fargo‘s various businesses generate enough money to cover any losses the crooks or bunglers cause.
Wells Fargo is accumulating lots of cash so it is a good dividend stock
Furthermore, Wells Fargo (NYSE: WFC) is a superb dividend stock that paid 45¢ on March 1, 2019.
Impressively, Dividend.com credits Wells Fargo with seven years of dividend growth despite all the scandals. Specifically, Wells Fargo’s dividend grew from 39¢ in June 2018 to 43¢ in July 2018, to 45¢ in March 2019. Hence, Wells Fargo’s dividend grew by 5¢ in a year.
Under these conditions, Wells Fargo shareholders received a dividend yield of 3.16%, an annualized payout of $1.80 and a payout ratio of 39.6% on March 14, 2019. Therefore, I think Wells Fargo was a bargain at $49.92 a share on that date.
Wells Fargo is a bargain because it is a Buffett favorite that pays a good dividend but sells for less than $50 a share. Finally, Wells Fargo can teach you a great lesson.
The lesson is moneymaking companies have terrible management. Thus, bad news about a moneymaking company can help you by reducing its shareprice.
Ultimately, Wells Fargo proves Warren Buffett’s idiot nephew can help you make a lot of money if you understand how he works.