I added shares of Bank of America (BAC) and Wells Fargo (WFC) to my portfolio. Analysts are still down on the financial sector. I think that these stocks are still a great contrarian play. An economic rebound is coming and these companies will benefit the most in the coming years.
Today’s Buys
August 27, 2010 By Leave a Comment
Today, I picked up shares of Bank of America (BAC) at $12.50 and added shares of Wells Fargo at $23.50. I am still a big believer in the long term viability of the financial sector.
The One Big Bank That You Never Hear About
June 28, 2010 By Leave a Comment
While Bank of America (BAC), JPMorgan Chase (JPM), and Wells Fargo (WFC) dominate the headlines, there is one large bank that just slowly continues to grow away from the limelight. That bank is US Bancorp (USB). US Bank took TARP funds just like the other big banks but unlike the other big banks has been able to escape the public backlash.
US Bank has been a longtime Buffet holding because of the company’s great management team and conservative approach to lending. The company’s management is a big reason why the banking giant’s loan portfolio has been outperforming that of its banking peers. It’s non performing loans percentage is much lower than Citigroup and Bank of America. US Bank is the 5th largest bank in the US based on asset size and US Bank has been quietly increasing its size by buying up failed banks over the past year. There have been continuous rumors that US Bancorp may acquire a larger regional bank to expand its operations.
US Bancorp has reported nearly two consecutive years of profitability. Last quarter’s earnings were very solid. USB had earnings of $648 million dollars and an EPS of 34 cents per share. Profitability increased 55% and total deposits increased almost 14%. The encouraging news was that consumer loan delinquency was decelerating even as the bank was increasing its reserves for loan losses. Investors should pay attention to the July 21st earnings release to see how US Bancorp’s sizeable commercial loan portfolio is holding up.
US Bank pays out a much higher dividend than its banking competitors. Shares of US Bancorp are not expensive but are not particularly cheap either at $23. Shares trade at 11 times forward earnings and 1.8 times book value.
Is It Time To Buy Wells Fargo?
May 25, 2010 By 1 Comment
While there has been much discussion about the trading practices at Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM), and Citigroup (C), one of the nation’s largest banks has managed to stay out of the line of fire. That bank is Wells Fargo (WFC). Wells Fargo is the fourth largest bank in the United States with over $1 trillion dollars in assets. The bank is also a longtime Warren Buffett holding because of its great management team and efficient operating structure. Wells Fargo has recently come under pressure dropping roughly 10% over the past week to $28.71. Wells was punished by a Goldman Sachs downgrade of shares of the banking giant. Should you use the dip to buy shares of Wells Fargo?
First we need to determine how much Wells Fargo is worth? Revenue has been strong for the current year. Wells has earned over $99 billion over the past fiscal year. While this is clearly an outlier due to a favorable banking environment, it does bode well for future prospects. Wells historically has earned between $40 and $50 billion dollars over the past 5 years. It stands to figure that Wells could easily earn $45 to $50 billion dollars annually. That figure doesn’t even include the full impact of the Wachovia acquisition. Credit losses from home foreclosures and loan modifications appear to be subsiding. As one of the largest home mortgage service providers, Wells Fargo stands to benefit from any stabilization in housing prices.
Net income can conservatively be estimated at $20 billion dollars. Factor in a minimum of $20 billion dollars in net income divided by a 5.2 billion float and you get an EPS of $3.85. Shares are currently selling at just 7 times normal earnings. Shares are also cheap based on book value, trading at just 1.45 times book value. It would be futile to try and calculate debt to equity since banks hide many of their obligations off the balance sheet. Return on equity and return on assets have been unimpressive recently coming in at 9% and 1% respectively. Over the past 5 years revenue has grown 24% and net income has risen almost 12%.
The economy may be recovering at a tepid pace but it is recovering nonetheless. The sooner that things return to normal, the sooner that financial companies will increase earnings and dividends will return. Since bank stocks should conservatively trade with a multiple of 10, a fair value for Wells Fargo is $38.50.
Disclosure: I do own shares of Wells Fargo.
Photo by: Ed Bierman
Banking On Bank Of America
December 28, 2009 By 1 Comment
I read an article today about how Bank of America has seen a rise in short interest. Traders are betting against the nation’s largest bank and expecting a decline in price over the short term. While this may be true I think that any weakness in the stock should be looked at as a buying opportunity. I have been buying more Bank of America(BAC) whenever the stock drops to the $15 range. Shorts may temporarily drive the stock lower but I would just look at this as an opportunity to purchase more shares at a cheaper price.
Over the next few quarters Bank of America will be taking billions in write-offs from its home loan portfolio, small business loans and its credit card division. The country’s largest mortgage lender has seen its earnings hurt by foreclosures and loan modifications. Bank of America’ has seen loans in its small business division rise to the high teens. BofA is the nation’s 2nd largest credit issuer and has seen defaults rise to the low teens. 2010 may be a rough year for the banking giant but 2011 and 2012 should be better. The stock trades at 20 times 2010 earnings but just nine times 2011′s estimated earnings. BofA is selling at just 1.3 times tangible book value and should earn close to $3 a share by 2012. While BofA is the riskiest of the three major banks(Bank of America, Wells Fargo, JPMorgan); I believe that the banking giant has the most upside potential as well.
Are Bank Earnings Really Better Than Expected?
April 20, 2009 By Leave a Comment
Bank of America (BAC) announced a profit of 4.2 billion dollars for the 1st quarter which surpassed analysts expectations. Analysts expectations were for a profit in the millions but not the billions. This is the latest bank to report earnings that exceeded Wall Street’s low expectations. Wells Fargo, Citigroup, JPMorgan Chase and Goldman Sachs all had earnings that surprised Wall Street. These inflated earnings have not been based on increased revenue but on acquisitions, change in mark to market accounting rules and lower interest rates. The problem for banks is that loan losses continue to rise and credit markets continue to weaken. I still don’t believe that the bottom is in for all financial firms as charge offs and credit losses will continue to rise. Banks also will not have government aid in future quarters to help prop up earnings. It appears that banks will need to raise more capital to deal with loan losses in coming quarters. The easiest way for banks to raise capital is by selling additional shares. The negative to this is that this will dilute existing shareholders’ equity.
Big Rebound
March 23, 2009 By Leave a Comment
As expected financial stocks soared today based upon a government plan to buy toxic assets from financial companies. Bank of America (BAC) is up to $7.80 a share. Just two weeks ago the stock was at $2.53 amid fears of nationalization. I still believe that Ken Lewis is in trouble but Bank of America will be okay as long as the stock can stay above $5. B of A has some very profitable businesses and should post solid numbers in an economic recovery. JPMorgan Chase rose $5 today to $28.86 per share. Wells Fargo (WFC) jumped 24% to rise above $17 for the first time in awhile. Even though these stocks have rallied over the past two weeks, many of them are still down over 80% over the past year. While I wouldn’t jump in and buy a ton of shares at their current prices; I would be a buyer on any pullback of 10% or more. I have been buying shares of Wells Fargo monthly.
Bank Stocks May Finally Be A Bargain
March 22, 2009 By Leave a Comment
The US Treasury is finally set to unveil its plan to buy toxic assets from banks. The public private partnership is expected to buy up to 1 trillion dollars in bank assets. The government hopes to entice private investors with guarantees and offering low interest loans to remove toxic assets from bank balance sheets. The government will share the risk if the toxic assets continue to decline in value. If these assets are removed from bank balance sheets without additional government ownership then the major banks should see their share prices increase substantially.
The Public-Private Investment Program should benefit Bank of America, Citigroup, JPMorgan Chase and Wells Fargo the most. These are 4 of the largest banks in the country and have balance sheets riddled with toxic assets. The 1 trillion dollar plan should help alleviate some of the problems facing these banking giants. All of the assets that are currently deemed as bad assets are not such and will have some value in the future. If the government holds these assets until the economy improves then the stock prices of the major banks should rise over a time. It may take a few years to see a significant rebound in price but with a plan finally in place the financial sector should improve. I have been a buyer of Wells Fargo, Bank of America and JPMorgan Chase at these distressed prices.
I don’t know if 1 trillion is enough to remove all of the bad assets from the balance sheets of banks but it is a good start.
Financials Start Cutting Dividends
March 4, 2009 By Leave a Comment
US Banks are finally cutting dividends to acceptable levels to conserve capital.
US Bancorp (USB) cut its dividend 88% from $1.70 to .20 per share.
PNC Financial (PNC) has reduced its dividend from$2.64 a share to .40. a share.
Wells Fargo (WFC) is the last big bank standing that has not reduced its dividend yet. I don’t know how long this can last with the stock barely above single digits.
Now that major banks are cutting dividends look for insurers and credit card companies to start cutting next. Dividend cuts at Capital One and American Express appear likely.
Bank Dividend Cuts
February 23, 2009 By Leave a Comment
JPMorgan Chase (JPM) cuts its annual dividend from $1.52 to 20 cents per share today. JPMorgan is preparing for a longer recession and double digit unemployment. JPMorgan has been deemed to be in the best financial shape of the other major banks. In the current marketplace that is like having the best seat on the Titanic. Banks are hemorrhaging and need every bit of capital that they can get their hands on. If JPMorgan is cutting their dividend then other major banks dividends are in trouble as well. Now that JPMorgan has cut its dividend, it will be easier for the following major banks to follow suit.
Wells Fargo (WFC) and its $1.36 dividend will likely go down to about 10 cents per share.
US Bancorp (USB) and its dividend of $1.70 is currently yielding over 16%. The yield is way too high. The new dividend would be about 10 cents per share.
PNC Financial (PNC) needs to cuts its $2.64 dividend with its 11.4% yield. PNC has not cut its dividend at all since receiving almost 8 billion in TARP money. PNC’s dividend should be cut to about 25 cents per share.
Suntrust Banks (STI) will probably undergo it third dividend cut in less than a year. I expect a drop from 40 cents to 8 cents per share.
Bank of New York Mellon (BK) is in the same boat as PNC Financial. Bank of New York has not had a dividend cut since receiving 2 billion dollars of TARP funds.
All of the dividend estimates are based on the Bank of America, Citigroup, JPMorgan models. Each of these banks cut their dividends to a yield that was approximately 1% of the stock’s price.
