To start this off right, I’d like to point out that Warren Buffett is extremely optimistic about the future of America. “Tomorrow’s always uncertain,” he mentions while on CNBC this morning. “But the future, the longer future, is always very certain. And that’s what you have to keep your eye on.”
It’s this very attitude that allows Mister Buffett to continue building astronomical stakes in businesses that he feels are worthy through the best of times and the worst of times. But how does Warren Buffett choose these particular companies to begin with? Let’s look at Wells Fargo, and find the evidence in this stock which he continues purchasing the most.
Wells Fargo has entered into Warren Buffett’s portfolio way back in the 1990s, and it is a great representation of his philosophy of long term investing. Plus, you can see a steady trend of continual buying of this stock since the first quarter of 2009. From that point until the present day, Berkshire Hathaway has bought 1 million 119,940,333 shares of Wells Fargo. This has brought the total position up to more than 422 million shares in all.
Warren Buffett made three very important moves in his portfolio during 2011, and Wells Fargo was one of them, along with Bank of America and IBM purchases. He provides shell holders several different reasons why this was important during his annual letter: “the banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels.”
Wells Fargo is also extremely large – since it currently serves about one out of every three households in the United States of America from its 12,000 ATMs, it’s 9000 branches and their website. They are also prominent in 35 different countries. This company is also the first in market value of its common stock out of all of the United States banks, and the fourth in assets.
Even though Warren Buffett requires a high ROI from a bank, he also insists that the return on investment be gained in a conservative manner. This is great, because Wells Fargo has a very well maintained and controlled operating environment. It has excellent ground rules in place to manage credit risk, and they monitor their loan portfolio performance very closely. It also has set ranges for its interest rates and market risks in its liabilities and assets, while it is able to fuel growth with ample capital levels and liquidity.
In addition, Wells Fargo will continue to remove nonperforming loans from its assets. During the third quarter of 2012, loans that were 90 days past due or more totaled in the amount of $1.5 billion. This is down a half $1 billion from the $2 billion at the end of 2011.
As well, Wells Fargo also solidified its position with capital. The equity earned in the third quarter was increased by $6.6 million from the second quarter numbers, and rose to $156.1 billion. Its tier 1 common equity reached the amount of $105.8 billion, which is equal to 9.9% of the risk-weighted assets. Wells Fargo also has a nice tier 1 capital ratio of 11.5% in their total capital ratio of 14.51%, as well as the tier 1 leverage ratio that they possess of 9.4% which rounds out the third quarter.
The other results that they gained during the third quarter are testament to showing that they are a strong company that can easily withstand economic uncertainty. The bank overall reported a total of $4.9 billion and earnings, which is up 8/10 of 1 billion from last year’s $4.1 billion at the same time.
The improvements that Wells Fargo gained this year were basically brought on by fee income and balanced net interest. They also have a strong credit performance, a diversified loan portfolio and further diversified sources of their fee income. They also grew across many of their businesses.
Wells Fargo’s third-quarter revenue grew to $21.2 billion, which is up from the $19.6 billion that it saw at the same time last year. The revenue was strictly sparked from noninterest income growth in the mortgage banking industry, and you can combine that with a mild increase in their income from that interest. They also originated 56% more loans this year than they did at the same time last year.
Also during the same quarter, Wells Fargo decided the buyback 17 million shares and they also paid a $.22 dividend. The previous year’s dividend was only $.12. During Warren Buffett’s 2010 letter, he predicted that Wells Fargo would have a dividend increase. He also expected that his largest gain in dividend would come from Wells Fargo. They were forced to lower it at one point, though it was “consistently prospering throughout the worst of the recession.”
Buffett seem to have a crystal ball so to speak, but he really knew that the fundamentals and Wells Fargo’s strategy of execution would easily survive the economic turmoil. He made his biggest stock purchases throughout the five years by buying shares during the biggest stock dips. Those took place during the first quarter of 2009, the third quarter of 2009 and the third quarter of 2010. But he’s actually made his biggest purchases over the last year, all while the stock has been rising by almost 23%.