The Inside Story on Warren Buffett's Largest Stock Holding
Most investors know about Berkshire Hathaway (BRK.A) - Get Report CEO Warren Buffett's ability to consistently identify winning stocks using his famous "value investment" theory. But do you know the name of the largest holding in his portfolio?
You might be surprised to learn that it's Wells Fargo (WFC) - Get Report . Berkshire Hathaway owns $25.7 billion worth of this stock, far larger than its famous stake in Coca-Cola, which currently totals $16.7 billion.
Wells Fargo has been on a tear lately and is set for even more gains.
What is the Wells Fargo recipe for success? We look deeper and explain why you should follow Buffett's lead on this stock and buy it now, while it's still at a reasonable valuation.
Wells Fargo is a diversified financial services company, providing retail, corporate and commercial banking services through several channels. These include banking stores and offices, the Internet and other distribution avenues, reaching out to individuals, businesses and institutions.
The nation's fourth largest bank by assets is way ahead of its rivals in several metrics. That's reason enough for Buffett to love this stock. In its business segment, Wells Fargo is undoubtedly one of the lowest-cost providers.
Let's turn our attention to return on common equity. Simply put, this is the amount of profit or net income a company earns per investment dollar. A company with high return on equity is more successful in generating cash internally. This is where Wells Fargo manages to outperform most of its peers. At about 15%, Wells Fargo is near the top quartile among all U.S. banks. And if you look at its size and compare it with key rivals, Wells Fargo is miles ahead of JPMorgan Chase, Citigroup and Bank of America, all of which score less than 10% on this parameter.
How did the company's third-quarter earnings turn out?
The bank earned $5.44 billion after payments to preferred shareholders, or $1.05 per share, for the three-month period ending Sept. 30. That compares with earnings of $5.41 billion, or $1.02 a share, in the same quarter a year earlier. If fourth-quarter EPS comes in at $1.03 as expected by Wall Street, Wells Fargo will round off the year with 1.2% growth and lay the foundations for greater growth next year.
Revenue for 2015 should show 2.5% growth and then pick up the pace at 5.4% next year. This is a solid growth curve at a reasonable price given that Wells Fargo trades at 12.3 times forward earnings, a slight premium over JPMorgan, Citigroup and Bank of America but worth it if we consider the company's better fundamentals.
The stock pays a decent dividend as well, with a yield of 2.7%. The company hasn't cut quarterly dividend payouts in 20 quarters.
Over the last five years, dividend payments have grown annually from 20 cents a share in 2010 to $1.35 cents in 2014. In 2015, there's been an increase of about 9%. If we consider Wells Fargo's eminent position (and strategy to save money and invest), it's a stable income-creator for dividend lovers.
No wonder, Wells Fargo features so prominently on Buffett's portfolio.
And did you know there are other value stocks that master investor Warren Buffett bought to kick-start his wealth early in his career? But now the Oracle of Omaha can't invest in these stocks anymore; he's too wealthy. But you can! If you're a non-billionaire, these stocks can change your whole life. Take a look.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.