Wells Fargo & Co.
) is well positioned to grow its business in the years ahead. At
its annual investor day event held earlier this week, the company
had come out of financial crisis well and achieved nine consecutive
quarters of earnings per share growth.
Wells Fargo announced its target of return on assets of 1.3% to
1.6% and return on equity of 12% to 15%, subject to economic and
regulatory environment. This is likely to support a shareholder
payout ratio of about 50% to 65%.
Wells Fargo's average return on assets between the first quarter
of 2009 and 2012 is 1.12% and average return on equity for the same
period is 10.97%.
Moreover, with a strong capability to generate organic capital,
Wells Fargo is well positioned for future attractive acquisition
opportunities but will adhere to discipline while assessing such
deals. Notably, since 2011, the company has completed six
transactions which include both loan portfolio purchases as well as
business unit acquisitions.
Notable among these were the purchases of BNP Paribas North
American Energy Lending, Burdale Financial Holdings Limited from
Bank of Ireland Group
) and EverKey Global Partners. These deals were completed in 2012.
Wells Fargo also made loan portfolio purchases from Irish Bank
Resolution Corp., Bank of Ireland and Allied Irish Bank in
Additionally, the company has agreed to buy San Francisco and
New York City-based Merlin Securities LLC, and the deal is pending
at this moment. The company plans to expand its operations in
international markets and augment its asset management
Last month, Wells Fargo reported its first quarter earnings
results. The company's first quarter 2012 earnings of 75 cents per
share were 2 cents ahead of the Zacks Consensus Estimate. Results
improved both sequentially and year over year. Results were
primarily driven by a higher top line.
We believe that over the long term, investors should not be
disappointed with their investments in Wells Fargo given its
diverse geographic and business mix that enable it to sustain
consistent earnings growth.
Going forward, we believe that strategic acquisitions will
expand Wells Fargo's business and improve its profitability. In
fact, Wells Fargo's growth plans have historically included a large
number of acquisitions, Wachovia being the largest in December
We believe that long-term investors, who can absorb the risks
related to economy and regulations, can expect decent growth in
Wells Fargo's earnings in the future. Solid capital levels, expense
management as well as improved credit quality will also support its
Notably, Wells Fargo passed the stress test of the Federal
Reserve with flying colors in March. Following the approval of the
capital plan by the Federal Reserve, Wells Fargo has hiked its
dividend by 10 cents to 22 cents per share.
Wells Fargo's capital plan also includes an increase in share
repurchase activity in 2012 compared with the prior year. It also
incorporates selective redemptions of trust preferred securities
that no longer count as Tier 1 Capital under the Dodd-Frank Act.
Such efforts have a positive impact on the stock price.
Yet we believe the top-line headwinds will persist, given the
protracted economic recovery. Plus, a low interest rate environment
would keep its margins under pressure. Wells Fargo's unrelenting
legacy mortgage issues also remain a concern. With the thrust of
new banking regulations, there will be pressure on fees, and loan
growth could remain feeble.
According to the Zacks Consensus Estimate, Wells Fargo is
currently expected to report earnings of 81 cents per share in the
second quarter of 2012, representing around a 16% increase year
over year. For 2012, the company is likely to report earnings of
$3.27 per share, also 16% above the reported figure for 2011.
Wells Fargo currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. Considering the fundamentals, we
also maintain a long-term Neutral recommendation on the stock.
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