Why Did Wells Fargo Rise on Earnings?

Wells Fargo (WFC) is one of the largest financial service corporations in the United States.

The company operates in four segments: Consumer Banking and Lending, Wealth and Investment Management, Corporate and Investment Banking, and Commercial Banking.

Wells Fargo has been notably hampered by an asset cap put in place by the Federal Reserve due to its scandal involving fake accounts several years ago.

This has cost the bank billions in profits and caused pain for shareholders. Only now is the stock beginning to trade above pre-pandemic levels.

However, the new management team has made significant strides towards removing the asset cap, streamlining the bank, and cutting costs. While banks like JP Morgan and Citigroup fell when Q4 2021 earnings were released, Wells Fargo appears to be on the rise.

I am bullish on Wells Fargo stock.

Q4 Earnings

Wells Fargo reported Q4 and Fiscal Year 2021 earnings on January 14, 2022.

Earnings per share (EPS) came in at $1.38, or $0.25 ahead of analyst estimates. Revenue came in at $20.86 billion, more than $2 billion ahead of estimates.

Some of these gains resulted from decreases in the allowance for credit losses, which underscored positive areas of the economy. For the full fiscal year, the company earned $4.95 per share.

The bank also issued encouraging guidance. Wells Fargo is working diligently to cut costs. Interest rates are also soon rising, which should significantly increase net interest income.

These combined factors, according to management, will increase EPS in fiscal 2022 by $1. EPS estimates for 2022 are now over $5. This would put the current forward price-to-earnings (P/E) ratio under 12, a very reasonable valuation.

Share Buybacks, Dividend

Wells Fargo’s dividend has been constrained in recent years. At the onset of the pandemic, the dividend was slashed from $0.51 per quarter to just $0.10 quarterly.

The dividend was recently raised, however, to $0.20 quarterly per share. This was a substantial raise for shareholders. Still, the current yield is just 1.03%.

This is far lower than other comparable banks. JP Morgan currently yields over 2.5%, and Citigroup yields above 3%. The Wells Fargo dividend is exceptionally safe, with a payout ratio of just 12.5%.

Wells Fargo also reported significant stock buybacks, particularly in the latter half of 2021. All told, the company repurchased $14.5 billion in stock during fiscal 2021.

This amounts to over 6% of the current market cap. Share buybacks are an excellent way for management to support shareholders in the marketplace.

The buybacks also serve to raise the EPS. Wells Fargo appears committed to significant buybacks again in 2022, which is excellent news for investors.

Turning to Wall Street

Wall Street analysts are very optimistic about Wells Fargo’s stock. The company has a Strong Buy rating based on 14 Buys, four Holds, and no sell recommendations.

The average Wells Fargo price target of $61 implies 7% upside potential.

More Upside Ahead

Wells Fargo stock is finally emerging from its pandemic-related downturn and making significant progress for shareholders.

Potential removal of the asset cap in the future could also spur shares higher. Earnings for Q4 are encouraging as profitability increases.

Upcoming interest rate hikes could further expand net interest income while management simultaneously cuts costs. This will significantly increase EPS. Add a robust buyback program, and Wells Fargo is set up for an excellent 2022.

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