Why Warren Buffett Wants the Fed's OK to Buy More Wells Fargo Stock
One of billionaire investor Warren Buffett's most memorable bits of investing advice is to be greedy when others are fearful.
Wells Fargo (WFC) - Get Report stock's 15% drop this year, as large U.S. banks get pummeled by low interest rates and volatility related to lackluster oil prices, slowing Chinese growth and the United Kingdom's decision to leave the European Union, gives the Berkshire Hathaway (BRK.A) - Get Report CEO the chance to follow his own suggestion.
Buffett hasn't said whether he will, but Berkshire's request for Federal Reserve approval to expand its stake in the San Francisco-bank beyond 10%, a threshold for increased government scrutiny, opens the possibility. Wells Fargo is already one of Buffett's four biggest equity holdings, and thanks to the bank's buybacks, his stake grew to 10% earlier this year, according to a March regulatory filing.
The requirement that investors seek Federal Reserve permission to to hold more than 10% of a financial institution is a provision of the Change in Bank Control Act, which is used by regulators to monitor activity between banks and non-financial institutions, and prevent acquisitions that might be harmful to customers or the general public.
"Berkshire is seeking permission to retain its current ownership position in Wells Fargo and to acquire additional shares of common stock of Wells Fargo," the Omaha, Neb.-based company said in an application to the Fed. "Berkshire does not have any specific transaction or dollar value in mind."
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"If Berkshire Hathaway were to simply maintain their current ownership in Wells Fargo shares, their ownership percentage would likely have drifted above 10% at June 30 due to continued share repurchase activity on the part of Wells Fargo," Edward Jones analyst Jim Shanahan said in an email. "The application by Berkshire Hathaway to boost their Wells Fargo stake above 10% is likely to be due more to continued share repurchase activity by Wells Fargo management rather than anything strategic on the part of Berkshire Hathaway."
Berkshire has been investing in Wells Fargo for almost 30 years. The other three companies among Buffett's top holdings are Coca-Cola (KO) - Get Report , IBM (IBM) - Get Report , and American Express (AXP) - Get Report .
"We value Berkshire Hathaway as a long-term shareholder and customer, and we appreciate the confidence that Berkshire's executive team has shown in Wells Fargo," Wells Fargo said in an emailed statement.
Berkshire's application said that the company hasn't purchased stock in Wells Fargo since Oct. 21 and that it has no plans or proposals to merge, liquidate, or sell any portion of the bank or change its business strategy or corporate structure.
Prior to its purchases in 2015, the conglomerate "hadn't made any significant purchases of Wells Fargo shares since the second quarter of 2013," Shanahan said. Over the past 13 years, Berkshire increased its shares in Wells Fargo by about 3.4%, he added.
"Berkshire does not have any present intention to acquire additional shares of common stock of Wells Fargo," according to the filing. The company said it nonetheless "routinely assesses market conditions and may decide to purchase additional shares," depending on the potential gain from such an investment.
The third largest U.S. bank by assets, Wells Fargo recently passed the Fed's annual stress tests and won permission to increase its quarterly common stock dividend to 38 cents a share.
"Our ability to consistently provide industry-leading capital returns and maintain strong capital levels, while also being mindful of evolving regulatory capital expectations, reflects the benefit of our diversified business model and sound risk management discipline," CEO John Stumpf said in a statement.
Wells Fargo was trading at $45.91 on Tuesday, and its year-to-date slide is line with the KBW Bank Index. The broader S&P 500 has gained about 2% in the same period.