Buffett Now Has 19.4% of Portfolio in Wells Fargo: Why it’s the Better Bank Stock
In Buffett-land, the big headline this past week was the revelation that Berkshire Hathaway (BRK.B) established a new position in the stock of John Deere (DE). Warren Buffett’s conglomerate reported it picked up nearly 4 million shares of Deere in the third quarter.
Sure, new holdings are always of interest. But the Deere stake doesn’t really deserve all the attention. For starters, it’s currently valued at less than $350 million. That’s pretty much a rounding error for Berkshire Hathaway’s $75 billion investment portfolio. In fact, the Deere position isn’t even Buffett’s; the small size means it’s a pickup for Ted Wechsler or Todd Coombs, his investing lieutenants.
If you’re looking for what the Oracle himself is interested in, turn your attention to Wells Fargo. (WFC). In the third quarter, Buffett -- yes, this is very much his stock -- picked up another 11.5 million shares of Wells Fargo boosting Berkshire’s stake in the bank to more than 420 million shares. The current market value of those 11 million new Wells Fargo shares is more than the entire Deere stake.
And the interest in Wells Fargo is a continuation of a four-year trend. Since the end of 2008, Berkshire Hathaway has increased its Wells Fargo stake from 290 million shares to 422.5 million shares, and the bank stock’s share of the overall Berkshire portfolio has grown from 16.5% to 19.4%. Yep, nearly $1 in every $5 dollars of Berkshire’s investment portfolio is riding on Wells Fargo. Berkshire’s Coca-Cola (KO) position is the only bigger bet, at just a tad more than 20% of the portfolio. But Berkshire hasn’t added to its Coca-Cola position for years.
Buffett has been buying Wells Fargo throughout 2012 even as the stock has been climbing. Through the first nine months of the year, Berkshire Hathaway had added 38 million more Wells Fargo shares.
And it looks like there will be more buying reported for the fourth quarter as well. True to his “be greedy when others are fearful” mantra, Buffett told CNBC he picked up more shares of Wells Fargo in October when financials were getting smacked around. From Buffett’s vantage point, the falling stock price -- it was down more than 6% from early October through late October when he chatted with CNBC, and is down more than 10% from early October through mid November -- meant he could pick up what he clearly sees as a dominant long-term value in the financial sector, at a compelling valuation, a PE ratio of about 10 right now.
So what’s so attractive? Well, Wells Fargo is distinctive for what it doesn’t do: rely on proprietary trading. Instead, Wells Fargo grinds it out the old fashioned way, with an emphasis on fee generation through retail and small business accounts. That’s a far more predictable-and sustainable-focus than the vagaries of a prop desk’s risk profile; see JPMorgan Chase (JPM).
One key consumer market is home loans. According to Inside Mortgage Finance, Wells Fargo is writing about one-third of all retail mortgages this year. The Mortgage Bankers Association expects mortgages for new purchases to increase 16% next year.
That’s the sort of tailwind that can keep Wells Fargo’s profitability rising.
And for the dividend seekers out there, Wells Fargo is itchy to get its payout ratio back above 30%, from its current 24%. The Wells Fargo dividend yield is not quite 3% right now.
Carla Fried is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.