WFC - Wells Fargo

[cmlber]

I don't expect a recession in 2017 but perhaps in 2018 or 2019. In any case, I think we are getting closer to the end of this economic upcycle. The zero LL provisions that many banks have been experiencing are not sustainable and at some point, the LL provisioning habe to normalize, even if we do not have a recession.

 

Since 1980 WFC is up about 50x, excluding dividends, despite several recessions.

 

If you normalize LL provisions for a 20-30 year average, you get EPS around $3.70/share, if 2/3 of that get's returned to shareholders you're getting ~5% distributed annually through buybacks and dividends and the 1/3 of earnings that is retained should grow EPS by 5-7% (simple math, retain 35%, earn a ROIC of 15-20%, 35% x 15-20% = 5.25%-7%).  So you're getting a long run 10-12% IRR on a safe business when 10 year treasuries are yielding 2.3%.  Sure, you will not make 10x your money on WFC in a short period of time, but you will do very well over an extended period of time.

 

Either 10 year treasuries are wildly overpriced, or WFC is wildly underpriced.  And if it's 10 year treasuries that are wildly overpriced, WFC's earnings/ROE/multiple are all likely to rise. 

 

[boilermaker75]

I don't expect a recession in 2017 but perhaps in 2018 or 2019. In any case, I think we are getting closer to the end of this economic upcycle. The zero LL provisions that many banks have been experiencing are not sustainable and at some point, the LL provisioning habe to normalize, even if we do not have a recession.

 

Since 1980 WFC is up about 50x, excluding dividends, despite several recessions.

 

If you normalize LL provisions for a 20-30 year average, you get EPS around $3.70/share, if 2/3 of that get's returned to shareholders you're getting ~5% distributed annually through buybacks and dividends and the 1/3 of earnings that is retained should grow EPS by 5-7% (simple math, retain 35%, earn a ROIC of 15-20%, 35% x 15-20% = 5.25%-7%).  So you're getting a long run 10-12% IRR on a safe business when 10 year treasuries are yielding 2.3%.  Sure, you will not make 10x your money on WFC in a short period of time, but you will do very well over an extended period of time.

 

Either 10 year treasuries are wildly overpriced, or WFC is wildly underpriced.  And if it's 10 year treasuries that are wildly overpriced, WFC's earnings/ROE/multiple are all likely to rise.

 

And why WFC is my second largest position. Although a distant second to BRK!

[John Hjorth]

CNN Money: Outburst by angry Wells Fargo shareholder halts annual meeting.

 

Participation in the meeting appears to have been entertaining.

[Guest Schwab711]

WFC $33 Jan 2019 calls are trading at:  $22.00 - $22.65

WFC Oct 2018 warrants are trading at:  $21.72

 

However, the warrants will be worth 1.01 shares/warrant by expiration.

 

Essentially, write a WFC $33 Jan 2019 call and purchase the warrants with that funds received. You should end up with the excess value of the 1 free share per call you write (or nothing at all) while putting negative money to work (premium from writing calls should exceed cost of warrants today - change the mix however you prefer). By the time the warrants mature, their strike price should be in the $33.25 - $33.45 range, assuming the stock price is relatively flat.

 

I will not do this but figured I'd share.

[bobp]

Something to keep in mind with all the tarp warrants - the extra .01 shares that the warrant controls is not "free". The terms are not 1 warrant plus the strike buys 1.01 shares. The warrant will control 1.01 shares at the strike times 1.01. It's still the strike PER share. Confusing, but you pay for the additional shares with all the tarp warrants. The extra still increases the warrant value by the .01 times the amount in the money. Not as valuable as the extra at no cost.

 

And, I could be wrong. But I'm pretty sure this is correct.

 

WFC $33 Jan 2019 calls are trading at:  $22.00 - $22.65

WFC Oct 2018 warrants are trading at:  $21.72

 

However, the warrants will be worth 1.01 shares/warrant by expiration.

 

Essentially, write a WFC $33 Jan 2019 call and purchase the warrants with that funds received. You should end up with the excess value of the 1 free share per call you write (or nothing at all) while putting negative money to work (premium from writing calls should exceed cost of warrants today - change the mix however you prefer). By the time the warrants mature, their strike price should be in the $33.25 - $33.45 range, assuming the stock price is relatively flat.

 

I will not do this but figured I'd share.

[Green King]

Something to keep in mind with all the tarp warrants - the extra .01 shares that the warrant controls is not "free". The terms are not 1 warrant plus the strike buys 1.01 shares. The warrant will control 1.01 shares at the strike times 1.01. It's still the strike PER share. Confusing, but you pay for the additional shares with all the tarp warrants. The extra still increases the warrant value by the .01 times the amount in the money. Not as valuable as the extra at no cost.

 

And, I could be wrong. But I'm pretty sure this is correct.

 

WFC $33 Jan 2019 calls are trading at:  $22.00 - $22.65

WFC Oct 2018 warrants are trading at:  $21.72

 

However, the warrants will be worth 1.01 shares/warrant by expiration.

 

Essentially, write a WFC $33 Jan 2019 call and purchase the warrants with that funds received. You should end up with the excess value of the 1 free share per call you write (or nothing at all) while putting negative money to work (premium from writing calls should exceed cost of warrants today - change the mix however you prefer). By the time the warrants mature, their strike price should be in the $33.25 - $33.45 range, assuming the stock price is relatively flat.

 

I will not do this but figured I'd share.

 

I recall reading language allowing cashless exercise.

[Guest Schwab711]

@GreenKing - There's definitely cashless exercise and I think it's pretty crucial for this being interesting. Otherwise market risk would probably kill any arb bips.

 

Something to keep in mind with all the tarp warrants - the extra .01 shares that the warrant controls is not "free". The terms are not 1 warrant plus the strike buys 1.01 shares. The warrant will control 1.01 shares at the strike times 1.01. It's still the strike PER share. Confusing, but you pay for the additional shares with all the tarp warrants. The extra still increases the warrant value by the .01 times the amount in the money. Not as valuable as the extra at no cost.

 

And, I could be wrong. But I'm pretty sure this is correct.

 

Helpful clarification, thanks. Investors are definitely only entitled to the excess value of that 0.01 share.

[sleepydragon]

http://in.reuters.com/article/milken-conference-wells-fargo-idINL1N1I319I

 

"When you put your shareholders first – I hope Warren Buffett isn't listening by the way – but when you put them first, then you're going to make mistakes. Because you're going to make short-term decisions that aren't focused on creating a long-term, successful company," Sloan said.

 

--

This sounds to me a stupid things for Sloan to say. They made a mistake, and now they blame shareholder? How did shareholder benefit from all this? This new CEO doesn't seem very shareholder friendly.

[Jurgis]

http://in.reuters.com/article/milken-conference-wells-fargo-idINL1N1I319I

 

"When you put your shareholders first – I hope Warren Buffett isn't listening by the way – but when you put them first, then you're going to make mistakes. Because you're going to make short-term decisions that aren't focused on creating a long-term, successful company," Sloan said.

 

--

This sounds to me a stupid things for Sloan to say. They made a mistake, and now they blame shareholder? How did shareholder benefit from all this? This new CEO doesn't seem very shareholder friendly.

 

Wow, that does sound like a stupid soundbyte. Were they really pushing the millions of fake accounts because of some shareholder-focus? Not their own bonus-focus? Really?

[KCLarkin]

"When you put your shareholders first – I hope Warren Buffett isn't listening by the way – but when you put them first, then you're going to make mistakes. Because you're going to make short-term decisions that aren't focused on creating a long-term, successful company," Sloan said.

 

--

This sounds to me a stupid things for Sloan to say. They made a mistake, and now they blame shareholder? How did shareholder benefit from all this? This new CEO doesn't seem very shareholder friendly.

 

Yes, it is incredibly stupid. Perhaps some shareholders aren't focused on creating a long-term, successful company. But most are. And if management makes short-term decisions to please wall street analysts, they aren't acting that way because they are putting shareholders first. They are acting that way because they are putting management's job security first.

[DCG]

Well, he's right in that their main focus should be on their customers and not shareholders, but definitely a poor choice of words.

[John Hjorth]

Well, he's right in that their main focus should be on their customers and not shareholders, but definitely a poor choice of words.

 

That is about what disquingishes a CEO - from a CEO.

[sleepydragon]

So now Berkshire holds less than 10% of WFC total shares outstanding, does that mean Buffett doesnt have to be restricted to a "passive investor"? He perhaps is now allowed to give some influence to the board, perhaps starting with giving out less stock compensation to employees (33mn shares just in Q1 2017)  and maybe take a board seat?

 

[boilermaker75]

https://finance.yahoo.com/news/philly-throws-another-punch-wells-185950148.html

[Viking]

I was disappointed with Wells Fargo investor day. Costs will remain elevated into 2019; there seems to be little urgency to deal with elevated expense ratio. Revenue growth will also be low.

 

They also issue a large amount of new shares every year as part employee compensation. This dilution offsets a little more than half of all buybacks they do as part of their capital return program. As a result shares outstanding only fall by about 2% per year.

 

US banking continues to be my favourite sector currently. Hard to see a good reason to hold WFC today over the other large US banks.

[sleepydragon]

I was disappointed with Wells Fargo investor day. Costs will remain elevated into 2019; there seems to be little urgency to deal with elevated expense ratio. Revenue growth will also be low.

 

They also issue a large amount of new shares every year as part employee compensation. This dilution offsets a little more than half of all buybacks they do as part of their capital return program. As a result shares outstanding only fall by about 2% per year.

 

US banking continues to be my favourite sector currently. Hard to see a good reason to hold WFC today over the other large US banks.

 

I agree with you, but i added more today. The valuation is too cheap

[sleepydragon]

http://www.vanityfair.com/news/2017/05/wells-fargo-corporate-culture-fraud

 

[oddballstocks]

http://www.vanityfair.com/news/2017/05/wells-fargo-corporate-culture-fraud

 

Met a mortgage banker who was at WFC.  Very high producer.  He left WFC for JPM, said JPM had been begging him to leave, but he didn't have a reason to.  Then the banking fraud thing happened.  He said it didn't happen to any of his customers, and thought his business would be untouched.  In the end it had such a big impact on WFC's reputation that he felt he'd never make the same commissions again and finally jumped ship.  I don't remember exact numbers, but this guy was doing something like $10-15m per year in originations.  Anecdotal point for sure, but interesting.

 

On the flip side this whole fraud thing might be inside baseball.  I was presenting to a bank in the Southwest as this story was all over the news.  The bank shared a building with a WFC branch on the first floor, this bank had the upper floors. I incorporated what I thought was a really witty joke about making sure the earnings generated for the bank from our product didn't come from fake accounts like the guys downstairs.  It fell flat, I had a room full of bankers staring blankly at me.  I tried to explain it, but when you're explaining a joke it's never good.

[racemize]

Have you gone crazy since Scott left or something?

[DooDiligence]

Have you gone crazy since Scott left or something?

 

yes, I wish he'd re-take the lead Troll position here (my meds are running out - damn you Express Scripts)

[racemize]

There's really no need--I have never used the ignore function, but you seem to be begging for it.

[Valuehalla]

Stresstest will be out on 28th June

 

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170601a.htm

[Valuehalla]

How are your expectations concerning the dividend of WFC, when the stresstest will be out?

 

Can we expect an increase of the dividend?

[Viking]

Valuehalla, my read with CCAR is of all the big banks WFC will have the smallest increase in total payout and the smallest dividend increase. WFC has had a solid total capital return the past few years (hard to have a big increase when you already have a decent payout). A potential issue for WFC is how poorly they handles the sales account scandal (the first couple of months); perhaps they fail the qualitative side of CCAR and this results a lower amount approved for capital return. Total earnings are not growing at WFC and this also impacts capital return.

 

Regarding the dividend, WFC already has a very high dividend payout of over 30% (yield is a little under 3%) and the regulators are likely going to require banks to hold extra capital on payouts over 30%. The Wells CFO mentioned this on the last quarterly conference call and the implication is they be will penalized if they increase the dividend moving forward. Bottom line is WFC will likely announce only a small increase in the dividend. 

[Valuehalla]

Thx Viking, i share your view. With app 38 % payoutratio WFC is on the top of the big banks. I am also in BAC, they just have app. 18 % payoutratio, here is a potential for a strong improvement in dividend.