Wells Fargo (NYSE:WFC) reported third quarter 2015 earnings Wednesday, and I believe the good results, which were met by a price decline, provide a good buying opportunity. Wells Fargo looks especially interesting for dividend growth investors right here. Third quarter Wells Fargo was able to grow revenues by three percent yoy, to $21.9 billion. Pre-tax pre-provision profit, a metric which describes the company's earnings before interest expenses, increased six percent yoy. Wells Fargo's net income grew one percent to $5.8 billion, earnings per share grew three percent to $1.05. The higher EPS growth rate reflects the company's lower amount of shares outstanding (the result of Wells Fargo's stock buybacks). With total average loans growing seven percent yoy (to $895 billion) and quarter end loans of $903 billion Wells Fargo's loan portfolio keeps increasing (even during the third quarter, as the amount was bigger towards the quarter's end). Wells Fargo's net charge off rate decreased to 0.31 percent in the third quarter (vs 0.32 percent last year), which shows the very high (and increasing) quality of Wells Fargo's loan portfolio. With a Common Equity Tier 1 ratio of 10.7 percent Wells Fargo continues to hold a strong capital position. Peer group Click to enlarge Among large banks such as JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Mitsubishi UFJ Financial (NYSE:MTU) Wells Fargo has the best capital returns by far: Wells Fargo's return on assets is the highest among the five: 1.32 percent in the third quarter, vs a peer group average of 0.69 percent -- Wells Fargo earns almost twice as much with the same assets as its competitors. Looking at return on equity we see that Wells Fargo again has the highest returns, 12.62 percent in the third quarter vs a peer group average of 8.49 percent. High returns on equity go along with high returns for shareholders, it is thus not surprising that Wells Fargo has been the best performing among the five since the financial crisis: Click to enlarge We can see that Wells Fargo has returned 120 percent over the last six years, which easily beats the four other big banks, whose returns were meager at best. Dividend Wells Fargo has shown a very strong dividend growth rate since the financial crisis ended, since 2011 the average growth rate is 33 percent, over the last two years Wells Fargo managed a twelve percent dividend growth rate. Click to enlarge Wells Fargo's dividend yield is 2.9 percent right now, the company's trailing dividend yield is 2.8 percent -- the highest over the last couple of years. This means that we have a good buying opportunity right now, as investors get a high initial dividend yield on their investment if they buy now. Wells Fargo will announce its next quarterly dividend in about two weeks, as Wells Fargo always announces its fall dividend at the end of October. Investors buying soon will thus be eligible to receive this dividend payment. Wells Fargo's dividend payout ratio is 34 percent, which means that Wells Fargo's dividend is very secure, and also has a lot of room to grow, as the company could easily raise the payout ratio to 40 or 50 percent. Valuation Click to enlarge Wells Fargo's valuation is not very high right now, which means that we have a good time to enter a position right now: The company's trailing PE ratio is 12.5, which is about the same it was twelve months ago, and lower than it has been over most of the last year. Wells Fargo's forward earnings multiple of 11.4 is lower than it was twelve months ago. Finally, Wells Fargo's price to free cash flow ratio of 14.4 is lower than it was this year so far (albeit it is higher than it was one year ago). We can also use the Graham formula to determine whether Wells Fargo is attractive at today's price: V= EPS*(8.5+2*G)*4.4/Y wherein EPS = earnings per share in the last twelve months G = estimated EPS growth rate over the next 5 years Y = yield on AAA corporate bonds If we apply Wells Fargo's numbers, and plug in Wells Fargo's current share price as the fair value, we can solve for G to get the required EPS growth rate (in order to justify buying right now). $4.11*(8.5+2*G)*4.4/4.1 = $51 By solving this equation for G we get to a required earnings per share growth rate of 1.5 percent -- if Wells Fargo grows at a faster pace in the next years, we have a very nice entry price right here. I believe an earnings per share growth rate of 1.5 percent is very much achievable, Wells Fargo's stock buybacks alone will yield a higher EPS growth rate, even if net income stays flat. The analyst consensus calls for EPS growth of nine percent annually over the next five years (source), which means that Wells Fargo would be significantly undervalued right now. Takeaway Wells Fargo reported strong results and beat estimates, yet is trading lower right now -- I believe this provides a good buying opportunity for dividend growth investors. With a high dividend yield, a high dividend growth rate and a low payout ratio Wells Fargo is a very nice dividend growth investment, and also has the best fundamentals (and performance) in the banking industry. Trading at a low valuation I believe Wells Fargo is a good pick at today's price. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WFC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Wells Fargo - 3Q2015 net income of $5.8bn, up 1% YoY, and revenue grew by 3%, to $21.9bn YoY, beating estimates. Chairman and CEO, John Stumpft credits the results to the bank's "diversified business model" that he said allowed the bank to "generate consistent financial performance in an uneven economic environment".