Just when it looked like Wells Fargo (WFC -0.03%) would finally be able to put its somewhat checkered past behind it, pow! New (but familiar) gaffes surface. The SEC is now penalizing the bank's investment advisory arm to the tune of $125 million for record-keeping failures.
That development follows another round of unauthorized account openings, reprising fading memories of 2016's scandalous opening of several million unauthorized bank and credit card accounts. Never even mind this year's industrywide bank-liquidity challenges put into focus by the collapse of SVB Financial's Silicon Valley Bank against the backdrop of a deteriorating lending market. It's a miracle the stock's held up as well as it has.
As the old adage goes, though, expect it when you least expect it. The swell of pessimism surrounding Wells Fargo stock right now is a prime entry opportunity into its long-term growth potential.
Wells Fargo under the microscope
Don't misread the message. The echoes of all Wells Fargo's past problems are still ringing. More recent ones are ringing as well. This isn't a bank with a particularly great reputation right now. By that same token, however, this isn't a bank with nothing to offer investors either.
Case in point: Its dividend. Income-minded investors can find yields bigger than Wells Fargo's current yield of 3.2%, but not many among banks of the same size and ilk. That's a dividend, by the way, that's been paid regularly every quarter for years now, and raised as long as the economy is on a firm footing. The only dividend cuts imposed in recent history came in the aftermath of 2008's subprime mortgage meltdown and following the advent of COVID-19 in early 2020.
Image source: Getty Images.
But Wells Fargo didn't exactly pass its most recent stress test with flying colors. It is true that the bank will be required to hold additional capital above and beyond the regulatory minimum. Nevertheless, the company is still raising its quarterly payout from $0.30 per share to $0.35 per share for the payment due in early September, and it's still buying shares back in earnest. Last month, it authorized up to $30 billion worth of stock repurchases.
For perspective, Wells Fargo's current market cap stands at just over $160 billion.
As for the health of its balance sheet and operation, there's strength on these fronts too. Last quarter's return on equity (ROE) improved from 7.2% in the second quarter of 2022 to 11.4% this time around. Its return on common equity (ROTCE) improved from 8.7% then to 13.7% now. Those figures are roughly in line with its first quarter's performance metrics, whereas rival banks like Bank of America and Citigroup both suffered sequential declines in equity-based returns last quarter. Last quarter's net charge-offs remain relatively muted at 0.32% of its total loan portfolio, while its loan-loss provisions are also reasonably tolerable at 1.56% of its loan portfolio.
It will shake off its past sooner or later
Companies are more than a mere collection of numbers, of course. And all the numbers cited above can always be improved. There's no such thing as a perfectly run bank.
Overall, though, Wells Fargo is faring better than the stock's recent and long-term performance suggests. It just looks, feels, and acts like the stock of a company that made a huge mistake several years ago that the market just can't forget, even if the organization itself has taken appropriate corrective measures in the meantime. In some ways, the fresh batch of unauthorized account openings -- no matter how small in scope it is -- replays the entirety of 2016's debacle in investors' minds. Then there's the seemingly slowing economy threatening banks' newfound interest income windfalls stemming from newly raised interest rates.
Keep it all in perspective, though. The economic headwinds are temporary, but the interest rate hikes aren't. Wells Fargo knows it can't afford yet another unauthorized account scandal, and it's monitoring that prospect as needed. The lending market's cyclical challenges are nothing new to the bank either.
This might help instill some bullish confidence in wobbly shares of this otherwise healthy company: Of the 27 analysts following Wells Fargo, 15 of them consider the stock an outright buy. At the same time, at its current price near $44.50, Wells Fargo shares are not only 13% below the consensus target of $50.52 per share, but nearer the lowest ($42) of all of these price targets.
Look past all the noise to see what the analysts are seeing.
