In that article, I commented on how Warren Buffett’s unrealized gains from Wells Fargo had dropped from 2.7 times Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) cost basis at the end of December to just 1.6 times its cost two-and-a-half months later.
Where is it today? According to CNBC’s Berkshire Hathaway Portfolio Tracker, the multiple’s dropped to 1.4 times its cost basis.
Buffett’s been selling a lot of stocks lately, but Wells Fargo isn’t one of them. Down 46% year to date on a total return basis through May 27, should Buffett be buying more?
Let’s have a look.
Buffett Can Buy More Wells Fargo Stock
If you recall, Berkshire asked the Federal Reserve if it could waive the informal 10% threshold so that it could own more BAC stock without prompting a review by banking regulators. According to CNBC, Berkshire now owns 10.9% of Bank of America’s stock.
So, assuming Buffett doesn’t want to go this route a second time, the company’s investment in WFC stock translates into a current ownership stake of 8.4%. If Buffett wanted to, he could buy another 65 million shares [based on 4.11 billion shares outstanding] without exceeding the 10% level.
But should he?
Not on Your Life
InvestorPlace contributor Tyler Craig’s May 8 headline says it best: Wells Fargo Is the Ugliest Bank Stock on the Planet.
What a great headline. Now keep in mind, Tyler’s a technician and a trader. He’s not necessarily concerned about the long-term health of the bank. He’s looking to help his readers make a buck on a well-timed trade.
In my colleague’s estimation, WFC makes a great bear candidate because it’s a lagging stock (down 46% YTD) in a lagging sector (Dow Jones U.S. Banks Index down 31% YTD). Since the May 8 article, WFC stopped down to below $24 before rebounding slightly. As I write this, Wells Fargo is trading at $27.50.
In the end, Craig’s call was the right one. Now that it’s moving higher, I don’t think we’ll see Buffett taking the bait despite the fact it’s trading at 50% off its 52-week high.
Once bitten, twice shy.
That 6.2% Dividend Is Now 7.4%
Let’s assume that Buffett was to buy 65 million shares of Wells Fargo stock at $27.50 a share. That would cost Berkshire $1.79 billion. It would generate $133 million in dividend income over the next four quarters.
Now, if Buffett bought the 65 million shares at the 52-week high, he’d still get the $133 million in annual dividends, but for a cost basis of $3.6 billion. If ever he were to buy more stock, now would surely be the time.
Not so fast. Google the words “Wells Fargo Dividend Health,” and you’ll find a lot of chatter about a possible dividend cut.
In mid-May, analysts from Keefe, Bruyette & Woods (KBW) suggested Wells Fargo was the likeliest candidate to announce a dividend cut. Even now, two weeks later and a slight recovery in its stock price, WFC’s yield is almost four times the S&P 500’s weighted dividend yield.
As the bank continues to wrestle with issues of its own making, the analysts believe the bank’s 220% payout ratio for 2020, which is four times the median payout ratio for banks covered by KBW, could be its undoing.
So, why have I put this information in the argument for Buffett buying more stock? Because Buffett’s the man who believes you’ve got to be “greedy when others are fearful.”
Berkshire paid an estimated $20.25 a share for the 345.7 million shares it owns in Wells Fargo. At $27.50, it’s not that far away. And think of the dividends.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.