Wells Fargo & Co: We May Have A Winner

Let's have a look at Wells Fargo & Co. (WFC) traded on the NYSE.

Company Profile:
From Yahoo Finance:

Wells Fargo & Company, through its subsidiaries, provides banking and financial products and services in the United States. The company operates in three segments: Community Banking, Wholesale Banking, and Wells Fargo Financial. As of March 24, 2007, it provided its services through approximately 6000 branches.

This is a large cap stock with a market capitalization of $117.96B.

Company Fundamentals:
I love to start an analysis by looking at the return on invested capital. Unfortunately, I was only able to find the 5 year average of 6.50% and the 2006 ROIC of 6.38%.

However, I was able to find the return on equity numbers. The 10 year average is 17.40% and the 5 year average is 18.39%. Very consistent ROE numbers throughout the 10 year period. I like consistency in my dividend payers.

Equity growth rate has also been the model of consistency with roughly an 11% consistent equity growth rate over the 10 year period.

Earnings per share growth rate? You got it. Model of consistency at around 12%. However, this has started to dip a bit in the last couple of years.

Sales growth rates have been right around the 9-10% range for the period. All in all, very solid consistent numbers. So far so good.

WFC 1-Yr. Chart

Dividend Fundamentals:
WFC is currently yielding 3.14%. Maybe not the biggest yield in the banking industry [see WM], but decent and better than both the S&P 500 dividend yield and the DJIA dividend yield.

Dividend growth rate has been sporadic with a ballpark average of about 11% but with spurts of dividend growth up to 24% and 36%. The growth has been slowing, and seems to have settled into the 8% range over the last 2 years. Decent, but not mind boggling.

Dividend payout ratio has been steady over the last 4 years in the low 40% range although it has climbed from a low of 35% in 1997. But definitely still within a conservative range.

Valuation Models:
The 5 year average high dividend yield is 3.32%. If I demand that from WFC, then the model price for this stock is $33.79. At its current price of $35.68, that is a premium of 5.61%. Not bad.

The Graham number works out to be $27.95 which implies a premium of 27.64%. For the discounted present value method, I used the following:

I have estimated the future P/E to be 13.97. That is the current P/E as well as the 5 year average P/E.

I have estimated the future EPS growth rate to be 10.98% (which is the 5 year equity growth rate). However, the analysts have forecast 10%. So I will use their more conservative estimate.

I will demand a dividend yield of 3.32% which is the 5 year average high dividend yield.

I have estimated the future dividend growth to be 8% which has been the growth over the last 2 years.

Using these numbers, the model price is $35.06. That is a premium of just 1.76%! See my calculations here.

Conclusion:
I think we have a winner here. The fundamentals all look good and the valuation models actually have this stock trading very close to its model price. I will be adding this stock to my watch list.

Full Disclosure: At the time of this writing, I do not own any shares in WFC.