Wells Fargo Excels at the Only Trade That Matters to Investors
It's just not for the reasons you might think.
A recent report suggests Wells Fargo secretly engages in the type of Wall Street trading activities in esoteric and risky products normally dominated by the likes of JPMorgan, Goldman Sachs (GS) and Bank of America (BAC) .
The truth is Wells Fargo's trading skill is far more pedestrian and profitable than one might think: buying back its own stock.
The nation's top mortgage lender may simply be effectively plying the very trading rules that its largest investor - Warren Buffett of Berkshire Hathaway (BRK.A) - has long advocated.
After disclosing a 48 million share buyback in fourth quarter earnings , Wells Fargo ended 2012 having repurchased roughly 120 million shares at an average price of $32.35.
As the San Francisco-based lender petitions the Federal Reserve to increase its dividend payout above current levels, Wells Fargo investors are likely appreciative of the bank's near $4 billion in total 2012 stock buybacks, which came, on average, roughly 8% below current stock trading levels.
Still, investors might want to see more by way of buybacks. Overall, Wells Fargo's share count didn't budge much in 2012 and buybacks basically offset share issuance for stock compensation. "
Using crude math and Wells Fargo's mean book value per share value of $26.56 reported through 2012, those buybacks came at an average price of roughly 121% of the firm's reported book value.
Buffett, an over 13% shareholder in Wells Fargo, may have been taking notes.
In December, the 'Oracle of Omaha' turned heads when Berkshire Hathaway authorized a $1.2 billion buyback at a price of 120% of book value, a higher premium than the 110% mark the financial conglomerate outlined as its threshold at the outset of 2012.
Wells Fargo's Wall Street brethren, most notably JPMorgan, have shown less aptitude in the buyback trade, and actual trading losses have made authorizations less predictable.
After a big 2011 buyback program, JPMorgan CEO Jamie Dimon was left apologizing to shareholders for a double digit loss on some of those repurchases. Meanwhile, a trading loss that exceeded $6 billion in 2012 forced Dimon to retreat from a $15 billion authorization for the year.
Wells Fargo and Berkshire Hathaway shareholders may not need to fear a similar buyback outcome as JPMorgan. Increasing price to book value buyback authorizations may simply reflect a recovering stock market and improving investor sentiment.