Eleven months ago we wrote the following about Wells Fargo (Symbol: WFC)

We think Wells Fargo shares could increase 50% or more over the next few years. We anticipate earnings per share to be around $3 in 2021, rising to $5 by 2023. We also expect the bank to gradually increase its quarterly dividend and its share buyback program. Combined, these programs produce a shareholder yield of more than 15%. The biggest risk to the continued recovery is another recession, which could happen if COVID-19 mutates into a vaccine resistant strain. However, the world is now much better prepared to respond to new mutations and the vaccine manufacturers are already preparing to rollout boosters that account for mutations.

At the time, Wells Fargo stock was recovering from the COVID-19 sell-off and shares were trading in the low-30s. Fast forward 11 months and the share price has risen 75%. This increase is the direct result of management’s effort to cut costs and repair the company’s reputation. Today, Wells Fargo reported fourth-quarter earnings increased 109% year-over-year (18% quarter-over-quarter) to $1.38/share.

If Wells Fargo can produce consistent quarterly earnings of $1.40/share going forward ($5.60/year), shares should trade higher. At 12 times earnings, shares could rise into the mid-60s. We see room for additional upside when financial regulators at the Federal Reserve permit the company to pursue growth again by lifting the $1.95 trillion asset cap. A growing economy with higher interest rates and a steepening yield curve would also be positive for Wells Fargo’s earnings going forward. Further, Wells Fargo is not done with its cost-cutting measures. CFO Mike Santomassimo says “the bank is aiming for an additional $3.3 billion worth of cost cuts in 2022”.

According to its earnings supplement, Wells Fargo “Repurchased 139.7 million shares of common stock, or $7.0 billion, and issued 28.6 million shares, or $1.4 billion”. We expect the company to continue to repurchase shares and pay a quarterly dividend. The most recent $0.20 dividend was paid on December 1st, 2021.

Our original Wells Fargo post from nearly two years ago stated “If management executes its plan we should see earnings per share increase to more than $6 per share in 2021, which could lift the share price into the $60s.” Despite the terrible economic damage from COVID in 2020 and 2021, Wells Fargo management is reaping good results. The share price has risen close to $60. While we think moderate upside in share price continues to be likely, we believe the exceptional value opportunity in Wells Fargo we highlighted has been realized.

Brinker Advisor

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