I recently had the opportunity to take a look at Berkshire Hathaway’s 2011 annual report. In that report it showed that Buffett and company invested in 11 companies by purchasing their common stock during the same year. Every single one of these companies had a market value where their company exceeded $1 billion. But out of all 11 companies, there has only been one where he’s been adding to his position since the year 2005. The name of that company is Wells Fargo (WFC).
In all actuality, Wells Fargo is actually the second largest investment that Berkshire Hathaway currently holds. The total value of their investment is $13.7 billion. IBM is their third largest investment, and it values at $12.6 billion. While Coca-Cola is the largest investment of the company worth a total of $15.6 billion.
What you may not know is that Berkshire Hathaway actually took out their initial position in Wells Fargo in 1990. They spent a total of $289 million to purchase 5 million shares of the company. The position stayed stable from 1990 all away through 2004. Wells Fargo merged with Norwest in the year 1998, and the Wells Fargo stock was converted so one share actually ended up becoming 10 shares in the conversion. Ever since 2005, Warren Buffett and Berkshire Hathaway have added to their Wells Fargo position on a relatively regular basis.
This is how it has all broken out:
- In 2005, they purchased 38.7 million shares at an average price of $30.58 per share. The total cost for this purchase was $1,183,000,000.
- In 2006, Berkshire Hathaway purchased 28 million shares at an average price of $33.65 per share. The total cost of this purchase was $942 million.
- In 2007, they purchased 85.2 million shares at an average cost of $33.64 per share. The total cost of this purchase was $2,886,000,000.
- In 2008, Warren Buffett bought 1 million shares of Wells Fargo at an average cost of $32.29 per share. So the total cost was a little more than $32 million.
- In 2009, Berkshire Hathaway was able to acquire 29.8 million shares at an average price of $19.67 per share. The total cost of this purchase was $586 million.
- In 2010, they chose to buy 24.7 million shares at an average price of $28.64 per share. This totaled $707 million.
- The 2011 share purchase was for 41.1 million shares at an average price of $28.42 per share. The total cost of this purchase was $1,168,000,000.
- Finally, in the first quarter of 2012, Warren Buffett purchased 10.6 million shares of Wells Fargo at an average cost of $30.85 per share. The total cost of this purchase was $327 million.
All of this information was gathered from Berkshire Hathaway’s annual reports. Feel free to read through the annual reports on your own if you want to verify this information.
During the most recent annual meeting for Berkshire Hathaway, Wells Fargo was praised by Warren Buffett and he came right out and told us that it is one of his favorite investments. They’re actually ranked among the US banking industry as number one in total market value being worth $176 billion.
This is true even though it is only the fourth largest bank when you add up its total assets. They actually have the most extensive network of branch banks throughout the entire United States of America, and they total 6200 retail branches throughout 39 states of the USA. They also serve one out of three homes in the USA, and they are the originator of one out of four home mortgages and they even service home loans more than any other bank in the industry.
One thing you might want to note is that Wells Fargo has stuck with its plan by narrowing its focus. It planned on developing its original mission of commercial banking, and it has succeeded wholeheartedly in this endeavor. They never changed course along the way by jumping into high risk investment banking. This was the downfall of a lot of their major competitors. They also stayed local, whereas many of the competitors expanded into Europe. This is a major problem for some of these banks since many countries in Europe are experiencing enormous challenges from a financial perspective.
Wells Fargo’s assets are basically all in the US. A total of 97% of their assets are United States based, and 98% of their employees are also in the USA. They have a cross-selling strategy which they vigorously pursue, and they make it a point to get their existing customers to use additional products. This is a substantial part of their success, as the average customer of Wells Fargo actually uses around six products that their bank has to offer. This is much different from the way they operated where they only offered one or two in the 1980s.
Wells Fargo pulled in a net income of $16 billion in 2011. This is up from their numbers in 2008 where they only made 2.7 billion. They also made a major purchase in 2008, and they purchased Wachovia Bank for $15 billion during that year. This was a big addition to the bank because it expanded their presence in the South as well as the East in the United States. They were also capable of entering into brokerage services through this purchase since Wachovia is also the owner of A.G. Edwards. This gave them a much greater ability to cross sell more products to their existing customers.
The most important thing about Wells Fargo is their loan portfolio. It is in much better shape than the portfolios of their competition. Their net charge-offs were only 1.25% of their total loans of the first quarter of 2012. Bank of America’s net charge-offs were 1.8% and J.P. Morgan Chase’s net charge-offs were 2.19%. Citigroup was the worst at 3.19%.
There are many analysts expecting Wells Fargo to earn more than 10% per share over the next five years. The shares are currently valued at a reasonable 10 times earnings. This makes Wells Fargo a very attractive investment when you base it on risk/reward.