This stock market panic has served up some of the best bargain opportunities that we have seen in at least a decade.
The problem is that everything is happening so fast in the financial markets that it is hard to know what to focus on.
Two years from now, people are going to be kicking themselves for not buying this stock today.
This Is Definitely a Crisis, but It Isn’t a Financial Crisis
The share prices of American bank stocks are acting like the 2008 financial crisis has returned with a vengeance.
But here’s the thing…
There is no financial crisis happening amongst the big American banks. Not even a hint of one.
Wells Fargo & Co. (NYSE: WFC) shares have fallen along with the sector. Not all that long ago, this was a $60 stock. Today, this dominant banking franchise trades for less than $30.
Nothing that has happened at Wells Fargo justifies this share price decline. The only thing that has happened is panic in the financial markets.
In 2008, the big banks had balance sheets loaded with terrible loans made during the expansion of the housing bubble. Today, the balance sheets of the major banks are in terrific shape and their capital strength has never been better.
The entire sector was cleaned up during (and has been constantly scrutinized since) the 2008 financial crisis. Wells Fargo’s current rate of nonperforming loans specifically sits at a miniscule 0.56%.
I must also mention that unlike many of its peers’ loan portfolios, Wells Fargo’s loan portfolio performed admirably through the financial crisis too. Strong lending is at the core of this company’s business model.
Yes, there is no question that the American economy is about to take a major hit from the coronavirus… but Wells Fargo and the other big banks are more than equipped to handle it.
And yes, lower interest rates aren’t bullish for bank earnings, but this isn’t a major blow. Wells Fargo and the other big banks generate billions of dollars from credit card fees, asset management fees and bank fees.
Lower rates certainly don’t come close to justifying the giant share price decline that these stocks have just experienced.
This is a sector that offers great opportunity today, and Wells Fargo is one of my favorite ways to take advantage of it.
Astounding Shareholder Return
At the current share price, Wells Fargo is offering shareholders a total yield of almost 26%.
When I refer to “total yield,” what I’m talking about is the total amount of cash that the company is returning to shareholders. This is the combined total of Wells Fargo’s dividend and its rate of stock buybacks.
This is essentially the free cash flow that the business is currently generating.
Let me break it down…
Wells Fargo’s current share price is $29 per share. By purchasing shares at this price, an investor is getting…
- A dividend per share of $2.04
- Buybacks per share of $5.60.
The total cash returned to shareholders is $7.64 ($2.04 + $5.60 = $7.64).
On a $29 share price, that $7.64 cash return is a 26.34% shareholder yield.
The $2.04 dividend by itself equates to a massive 7.03% yield. That is an absurdly high yield for a dominant banking franchise like this.
On top of that, the run rate of $24.5 billion per year of share repurchases that the company completed last year returns another $5.60 per share to investors… which is another 19.31% on a per share basis.
This is the kind of opportunity that can be available only during a full-blown panic.
With the company spending so many dollars repurchasing shares, the share price decline is actually a good thing for long-term Wells Fargo investors.
With a current market valuation of $120 billion (number of shares times share price), repurchasing $24.5 billion worth of stock is going to reduce the share count by a shocking 20% in only 12 months.
It took Wells Fargo three years to repurchase 20% of its shares outstanding prior to the share price decline, so the benefit of the share buyback is now amplified.
The more the share count shrinks, the more value per share is left for remaining shareholders.
Wells Fargo offers everything that investors should be looking for. It is cheap and financially strong, and it offers a huge shareholder yield.
The stock market action is likely going to be ugly for a while, but two years from now, investors who snap up opportunities like this one will be very glad they did.
Good investing,
Jody
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