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Stock Analyst Update

Why We Still Like Wells Fargo

We expect the bank to repair its tarnished reputation given enough time, and the stock remains attractive relative to our fair value estimate--especially with a current dividend yield around 3%.

Mentioned:

 Wells Fargo (WFC) announced that a more intensive review of customer accounts found 3.5 million potentially fraudulent accounts opened between January 2009 and September 2016. While this review found 67% more problematic accounts than initially reported, it actually encompassed a review of 76% more accounts. Although the absolute number of faulty accounts is large, problems occurred with just 2.1% of total accounts reviewed, even using a more comprehensive methodology to look for problems. 

Furthermore, only 190,000 of these accounts incurred fees, and Wells Fargo is refunding just $6.1 million of revenue generated by these accounts to customers. In our view, these figures support our thesis that the vast majority of Wells Fargo’s revenue comes from legitimate sources. We believe that a more well-rounded sales incentive program is likely to reduce the cost of wasted employee time, improve front-line morale, and result in higher long-term shareholder value over time. That said, changes in company culture will not happen overnight, and additional misdeeds are likely to come to light as Wells Fargo remains in the spotlight for the wrong reasons. We expect Wells Fargo to repair its tarnished reputation given enough time, and the stock remains attractive relative to our $67 per share fair value estimate—especially with a current dividend yield around 3%.

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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.