Warren Buffett has created it clear that he isn’t abandoning Wells Fargo(NYSE: WFC) despite all of the issue the bank has gotten into of late. But that shouldn’t be interpreted as a signal for investors to buy its own stock.
I would even go so far as to argue that Buffett would not consider making as substantial of a investment (based on ownership percent) at Wells Fargo now as he did from the early 1990s, if he gathered Berkshire Hathaway‘s (NYSE: BRK-A)(NYSE: BRK-B) stake in the bank.
This isn’t solely because of the scandals that have come to light at Wells Fargo over the last year.
The first was its own fake-account scandal, shown from the Consumer Financial Protection Bureau past September, where thousands of its workers opened millions of accounts for customers without those customers’ approval.
The next big scandal at Wells Fargo that came out more recently was similar in nature, but instead of launching new checking or credit card accounts for customers, the bank illicitly signed up almost a half thousand of these for automobile insurance they didn’t require.
Buffett has coped with scandals at Berkshire Hathaway’s investments at the past, and he isn’t a fan of them. Here’s an excerpt from his introduction testimony prior to Congress in 1991 if he discussed a bond-market scandal at Salomon Brothers:
I and I need the right words and the full assortment of controls, respectively. However, I have requested every Salomon employee to be her or his own compliance officer. After they first follow all rules, I then need workers to inquire whether they’re ready to have any contemplated action look the following day on the front page in their neighborhood paper, to be read by their own spouses, kids, and friends, with the reporting achieved by an educated and vital reporter. Should they follow this evaluation, they don’t worry about my other message to them: Reduce money for your company, and I’ll be understanding; lose a shred of reputation for the company, also I will be ruthless.
Even though Wells Fargo has not lived up for this test over the last ten years or so, this isn’t the motive Buffett would steer away from purchasing a large stake in it.
The explanation is that Wells Fargo is a lot more expensive now than it had been in 1990 and 1989, the years Berkshire Hathaway amassed its stake at the financial institution.
Our buys of Wells Fargo in 1990 were helped by a market in bank stocks. The disarray was appropriate: Month by month of once banks were put on display, that the loan decisions. Often on the insides of managerial assurances that all was investors concluded that no bank numbers must be reliable — as one huge loss after a second was introduced. Aided by their own flight out of bank stocks, we bought our 10% curiosity about Wells Fargo for about $ 290 million, less than three times earnings, and less than five times after-tax earnings.
It is the final sentence that important since it permits you to compare what Berkshire compensated for Wells Fargo versus what today, it would need to pay from 1990. And as you can see from the table below, the bank is a not as attractive proposal at the current cost.
Multiple into Pre-Tax Earnings
Multiple into After-Tax Earnings
All this apart, despite Wells Fargo’s recent problems — that will undoubtedly impact its rate of growth over the long run — investors at the bank may proceed to rest easy in the fact that Buffett still has confidence in the bank, and it has said publicly that Berkshire will continue as one of its loyal investors.
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John Maxfield possesses shares of Wells Fargo. The Motley Fool possesses stocks of and urges Berkshire Hathaway (B shares). The Motley Fool has a disclosure coverage.