Wells Fargo & Company ( WFC Quick Quote WFC - Free Report) have been completely sold off from Warren Buffett’s investment giant, Berkshire Hathaway ( BRK.B Quick Quote BRK.B - Free Report) . As disclosed on Monday through a SEC filing, Buffett sold off the remaining 675,054 shares of the big bank, worth $32.4 million, in first-quarter 2022. Berkshire Hathaway began stacking up stocks of Wells Fargo since three decades ago, but has gradually been off-loading its investments since 2019. The company started facing regulatory issues since 2016, and in order to cope with the same as well as increase efficiency, Wells Fargo laid off a lot of its employees and divested certain businesses. In the year-to-date period, Wells Fargo’s shares have dipped 12.2%, narrower than the industry’s and the S&P 500’s declines of 17.2% and 14.6%, respectively. Image Source: Zacks Investment Research
Currently, Wells Fargo carries a Zacks Rank #3 (Hold). You can see
. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Let’s take a look at what has likely led to Buffett’s exit from the stock and how the banking giant is poised for the future. Legal Issues
Wells Fargo’s legal worries began in September 2016 following the revelation that the company had opened millions of unauthorized accounts, along with issues in its auto-insurance business, online bill pay services, and the Wealth and Investment Management segment. Since then, the bank has been charged with numerous penalties and sanctions, followed by a cap on its asset position by the Federal Reserve.
Further, in September 2021, the bank was levied with restrictions on acquiring certain residential mortgage servicing and a $250-million penalty due to its inefficient home-lending loss mitigation program. This aside, Wells Fargo still has a long list of pending legal cases and remains under close supervision of regulatory authorities. Divestures
Wells Fargo has undertaken several divestiture measures over the years to focus on its core operations and improve efficiency. However, in the near term, these moves might hamper the company’s business activities and have a negative effect on its revenues, making investors skeptical. In fourth-quarter 2021, Wells Fargo sold its Corporate Trust Services business to Australia-based Computershare Limited in order to concentrate on businesses core to its consumer and corporate client base. In the same quarter, Wells Fargo also divested its asset management business to private equity firms, GTCR LLC and Reverence Capital Partners, L.P., for $2.1 billion.
Earlier, in second quarter 2021, WFC sold its Canadian direct equipment finance business to The Toronto-Dominion Bank ( TD Quick Quote TD - Free Report) for an undisclosed amount and a substantial private student loan portfolio. Although Buffet has entirely offloaded his equity stake in WFC, the bank’s strong fundamentals should help it attract investors. Strategic Revamp to the Rescue
Wells Fargo’s divestiture measures over the years have resulted in significant cost savings for the bank. It is focused on reducing its expense base by streamlining organizational structure, closing branches and reducing headcount by optimizing operations and other back-office teams.
WFC expects realized and identified potential gross savings through these efforts to be in excess of $10 billion. Of this, it has already realized $4 billion in gross savings in 2021 and expects further expense reduction in 2022, backed by $3.3 billion of identified efficiency initiatives. Such efforts are likely to support Wells Fargo’s financials. Steady Capital Deployment Plans
Dividend-paying stocks always incentivize investors as they act as a steady source of income. Similarly, Wells Fargo’s
dividend payment and repurchase activities might encourage investors to maintain position in the company. In fact, in January 2022, the company increased the quarterly dividend for the first quarter to 25 cents per share, indicating a 25% sequential hike. This represents a dividend yield (annual dividend per share/stock’s price) of 2.3%, which is attractive for investors. Further, it has repurchased shares worth $18.3 billion from third-quarter 2021 through first-quarter 2022. Relative Value Pick
Although Buffett has disposed of his holdings in Wells Fargo, the stock is a great pick as the company’s multiples are lower compared with the industry. WFC’s price-to-tangible book (P/TB) multiple of 1.29 and forward price-to-earnings (P/E) multiple of 10.17 are lower than industry’s 1.92 and 10.84, respectively. This makes the company undervalued at present. Thus the stock can be held in one’s portfolio for now, which is also suggested by its Zacks Rank #3.
In the near term, Buffet’s exit might dampen investors’ confidence in the stock. Further, continued regulatory issues might make it harder for WFC to win shareholders' trust. Nevertheless, the company is making swift moves in its remedial journey, cost-saving efforts and steady capital deployment.
Given the recent interest rate hikes, banks’ outlooks are expected to improve. This might have led to Berkshire Hathaway’s ownership in banks like Citigroup, Inc. ( C Quick Quote C - Free Report) , Bank of America Corporation ( BAC Quick Quote BAC - Free Report) , The Bank of New York Mellon Corporation ( BK Quick Quote BK - Free Report) and U.S. Bancorp ( USB Quick Quote USB - Free Report) , which should be looked upon favorably by investors interested in the banking industry.