Last month in this column, I gave investors a heads-up on a possible bargain at Corning(NYSE: GLW) . I liked its business prospects given its price and I believed there was a “hidden opportunity for a massive dividend.” Two days later, Corning raised its dividend by 50%. Now, I’m no stock market Nostradamus. The timing was certainly lucky. But I tell you this for two reasons. As a reminder to look into buying Corning on dips (it’s understandably up a bit since that dividend announcement). Because today I want to tell you about another stock whose dividend is set to rise…
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Last month in this column, I gave investors a heads-up on a possible bargain at Corning(NYSE: GLW) . I liked its business prospects given its price and I believed there was a “hidden opportunity for a massive dividend.”
Two days later, Corning raised its dividend by 50%.
Now, I’m no stock market Nostradamus. The timing was certainly lucky. But I tell you this for two reasons.
- As a reminder to look into buying Corning on dips (it’s understandably up a bit since that dividend announcement).
- Because today I want to tell you about another stock whose dividend is set to rise dramatically.
I’m gonna warn you now, you may be squeamish at the prospect I’m about to throw out. It’s one of those “too big to fail” banks whose dividends have been decimated in the last few years.
But consider these three points:
- There’s often opportunity when other investors run away without analysing the situation.
- It’s the safest and “least Wall Street” of the big banks.
- Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) has owned it for years and has been buying up shares at prices around today’s!
Still with me?
You may have already guessed the bank, but humour me.
Take a look at the table below before we proceed. It shows America’s six megabanks along with their depressed price-to-tangible book ratios and a brief description of the type of banking they do.
|Bank of America (NYSE:BAC)||0.5||Combination Main Street and Wall Street bank|
|JPMorgan Chase (NYSE:JPM)||1.1||Combination Main Street and Wall Street bank|
|Citigroup (NYSE: C)||0.6||Combination Main Street and Wall Street bank|
|Wells Fargo (NYSE: WFC)||1.3||Main Street bank|
|Goldman Sachs (NYSE: GS)||0.9||Pure Wall Street bank|
|Morgan Stanley (NYSE: MS)||0.7||Pure Wall Street bank|
Source: S&P Capital IQ.
I’m actually quite bullish on the banking sector as a whole given current prices. I’d wager that the banking sector as a whole will beat the Dow Jones Industrial Average (INDEX: ^DJI) and the S&P 500 (Index: ^GSPC) over the next few years, but it’s the individual stock opportunities in banking that I like to focus on.
The megabank I want to highlight today is the one I think is the safest of the bunch. At the very least, it’s the most transparent. Let’s do this by process of elimination.
As pure investment banks, Goldman and Morgan Stanley are invested in more as a matter of faith in management and the organisation than any balance sheet analysis. JPMorgan, Bank of America, and Citi try to do it all — from the regular deposit and mortgage banking you and I use all the way to the Wall Street trading desks hedge funds use. As with Goldman and Morgan Stanley, the balance sheets can get quite tricky.
That leaves us with today’s pick: Wells Fargo. You may be surprised because it’s actually the most expensive bank of the bunch. But that can be misleading. The reason banks like Citi and B of A are trading for well under tangible book value is because investors aren’t entirely sure what exotic mess could be hiding behind Door No. 3.
In Wells, we’re paying a little extra for quality and transparency.
Wells pretty much sticks to the model that’s made banks money for centuries. It takes in deposits and lends to individuals and businesses. It pockets the interest rate spread between the two. And it does so really, really well. In its latest quarter, it had a net interest margin of 3.8%. It frequently runs that number above 4%, which is excellent.
Wells also does an excellent job cross-selling and up-selling its customers into multiple products such as its wealth management products and services.
A potentially explosive dividend
Today, we can buy an excellent operator that’s trading at historically low multiples on book value and earnings.
But I promised you a potentially explosive dividend.
Wells Fargo’s dividend peaked at $0.34/share per quarter in the first quarter of 2009. In a wise response to the financial crisis, it slashed those dividends almost to the nub — down to just $0.05.
Since then, it’s been busy shoring up its capital position and integrating Wachovia, the troubled bank it picked up at the height of the crisis.
Wells’ capital position is now stronger and the three-year Wachovia integration is almost done. And earlier this year, it raised that nickel quarterly dividend up to $0.12 (a 1.8% dividend yield). I believe that dividend is on a march upward and that it’ll reach the pre-crisis $0.34 sooner than people think.
As Wells Fargo steadily wins back shareholder love through an increasing dividend, I believe investors will boost its share price, too.
The result could be a double win for investors who get in early.
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Originally written by Anand Chokkavelu, CFA and published at fool.com. Anand owns shares of Wells Fargo.