Wells Fargo Pays Investors a 16% Total Return — Yet Nobody Knows!

Wells Fargo (WFC) is nothing short of a table-pounding buy right now.

The amazing thing is the attractiveness of this stock is sitting there in plain sight for everyone to see — yet nobody is taking advantage of it!

I’m referring to the company’s return of capital to shareholders.

Over the next 12 months, Wells Fargo is going to provide shareholders with a staggering total yield of almost 16%! When I say, “total yield,” what I’m referring to is the combined total of Wells Fargo’s dividend and share repurchases.

With the share price trading near $45, the dividend yield is 4.5%. That is an incredible yield in this zero-interest rate world.

And the share repurchases are even better.

In 2018 alone, Wells Fargo repurchased $20 billion of its own stock. And in 2019, the company’s disclosed capital plan is to repurchase another $23 billion.1

With a current market valuation of $200 billion (number of shares times share price), repurchasing $23 billion worth of stock is going to reduce the share count by almost 11.5%.

Combine that 11.5% return through repurchases with the 4.5% dividend, and we can see that Wells Fargo today offers shareholders a 16% total yield!

Share Buybacks – Better Than a Dividend When Done Right

We all love receiving a quarterly dividend payment.

Nothing feels better than passive income.

However, the reality is that share repurchases are a much better way to add value for shareholders when they are done right.

The key is that the shares being repurchased must be attractively valued.

That is why the aggressive share repurchases that Wells Fargo is undertaking today are such a powerful tool to increase shareholder returns — these shares are cheap!

Let’s walk through exactly how this works to better understand.

In 2018, Wells Fargo posted total earnings of $22.4 billion. With 4.6 billion shares outstanding that equates to earnings per share of $4.86.

By the end of 2019, Wells Fargo is going to have repurchased another $23 billion of stock. Using the current share price, that will reduce the share count by 511 million to just under 4.1 billion shares.

Conservatively, assuming earnings stay flat at $22.4 billion and with the share count reduced to 4.1 billion, earnings per share will grow from $4.86 to $5.46.

That means that Wells Fargo’s share repurchases have driven a 12.3% growth in earnings per share… even though actual earnings haven’t grown at all!

That is the power of a company repurchasing undervalued shares.

Since it’s earnings per share that drives a company’s stock price over time, this is a very good thing for Wells Fargo’s shareholders.

Wells Fargo’s Incredibly Sticky Deposit Base

But I know what you’re thinking…

For the past several years, Wells Fargo has had a steady stream of incredibly unfavorable press — all of it well deserved.

The worst of it was the bank having to admit that employees created 3.5 million bank accounts without the consent of customers.

No question the Wells Fargo reputation was dealt a major blow.

But do you know how much impact it had to the bank’s deposit base?

None…

Before the negative news flow began in 2015, total deposits sat at $1.2 trillion.

Today, after multiple years of negative publicity, the bank’s deposits are now $1.3 trillion.

The bank has gone through a scandal with literally no damage done to the core driver of its business.

That’s because it’s painful to even consider moving to a different bank. Nobody wants to go through all the paperwork to change the information for all their monthly bills.

That is why customers have mostly yawned at all the headlines.

The only thing that this bad news flow has done is provide us with a bargain share price for this blue chip bank.

As time passes, the negative aura around Wells Fargo is going to fade and the share price will rise.

Until that happens, the company will continue buying back $20 billion plus in stock each year to take advantage of the discounted share price, and thus it will continue paying investors a 16% total yield.

What an incredible bargain hiding in plain sight.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@StPaulResearch.com

1 Wells Fargo Financial Statements, SEC

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Jody Chudley

Jody Chudley is a contributing analyst to Lifetime Income Report and Contract Income Alert. Jody is a qualified accountant with a degree in Finance from Brandon University. After spending fifteen years in various finance and planning roles with an international financial institution, Jody set out to manage his portfolio on a full-time basis.

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