Wells Fargo: Financial Winner

NEW YORK ( TheStreet) -- Wells Fargo ( WFC) was the winner among the largest financial names on Thursday, with shares rising over 1% to close at $33.16.

The Dow Jones Industrial Average and S&P 500 ( SPX.X) saw slight gains and the NASDAQ Composite was up 1%, as a slew of decent economic reports overshadowed investors' continued concerns over the Fiscal Cliff.

The KBW Bank Index ( I:BKX) rose slightly to close at 48.65, with all but seven index components ending the session with gains.

The U.S. Labor Department reported that for the week ended Nov. 24, seasonally adjusted initial unemployment claims totaled 393,000, declining by 23,000 from the previous week's revised 416,000. The four-week moving average of initial unemployment claims was 405,250, increasing from the previous week's figure of 397.750. Economists on average had expected first-time claims to total 390,000, according to Briefing.com.

The Bureau of Economic Analysis announced that its second estimate of U.S. gross domestic product growth during the third quarter showed an annual growth pace of 2.7% over the second quarter. With a "more complete source data," the estimate increased significantly from the "advance" estimate last month of a 2.0% third-quarter growth rate.

The National Association of Realtors said that pending home sales during October rose to their "highest level in over five years," increasing 5.2% from September and 13.2% above pending sales in October 2011. The organization's chief economist Lawrence Yun said that "We've had very good housing affordability conditions for quite some time, but we're seeing more impact now from steady job creation, and rising consumer confidence about home buying now that home prices have clearly turned positive."

Fiscal Cliff, Investors and Housing.


The expiration of tax cuts enacted when George W. Bush and extended by President Obama is the biggest immediate fear for investors if the U.S. "falls off the Fiscal Cliff," with no compromise between the president and the Republican leadership of the House of Representatives on reducing the federal deficit by the end of the year.

While there's been plenty of cheerful talk from the president and Democratic leaders over a possible deal to avert the Fiscal Cliff, Speaker of the House John Boehner (R-Ohio) on Thursday said after a meeting with Treasury Secretary Timothy Geithner that "despite the claims that the president supports a balanced approach, the Democrats have yet to get serious about real spending cuts," according to a Reuters report.

An important concern for investors if the "Bush tax cuts" expire, is the end of the 15% federal income tax rate limitation on qualified dividend income, which includes most dividends on common and preferred stock. Under the current rules, if an investor's adjusted gross income keeps him or her under in the 15% tax bracket, the investor actually pays no federal taxes on the dividend income, so nearly all investors could see a massive new haircut to their dividend income.

Many companies are acting accordingly, by moving up quarterly dividend payments or making special dividend payments before the end of the year. For example, City National Corp. ( CYN) of Los Angeles on Nov. 15 announced that it would move its regular 25-cent quarterly dividend for the fourth quarter, that would be normally be paid in January, to Dec. 18. The bank holding company also announced a special 25-cent special dividend, payable on the same day.

City National closed at $48.59 Thursday, returning 12% year-to-date. The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for 12 times the consensus 2013 earnings estimate of $3.94 a share, among analysts polled by Thomson Reuters. Based on the regular quarterly payout, the shares have a dividend yield of 2.06%.

Jefferies analyst Ken Usdin on Thursday said that the "housing recovery still has legs," but added that "housing becomes more intertwined with politics in coming weeks given increased chatter that those earning over $250k per year could see limitations on mortgage interest tax deductions."

Wells Fargo's Return of Capital.


Wells Fargo's shares have now returned 24% year-to-date, following a 10% decline during 2011.

The shares trade for 1.6 times tangible book value, according to Thomson Reuters Bank Insight, and for nine times the consensus 2013 EPS estimate of $3.63. The consensus 2014 EPS estimate is $3.94. Based on a quarterly payout of 22 cents, the shares have a dividend yield of 2.65%.

Wells Fargo trades much higher to tangible book value than most other large-cap bank stocks in the current environment, reflecting its strong and consistent earnings performance. Over the past five quarters, the company's operating returns on average assets have ranged between 1.27% and 1.46%, and its returns on average tangible common equity have ranged between 15.59% and 16.85%, according to Thomson Reuters Bank Insight.

Barclays analyst Jason Goldberg on Nov. 12 said that he expects Wells Fargo to be among the large banks that "return the majority of their 2013 net income to shareholders in dividends and buyback next year." After the last round of Federal Reserve stress tests were completed in March, the company was approved to increase its quarterly dividend by 10 cents to the current 22 cents, and repurchase $3.5 billion in common shares, through the first quarter of 2013.

Following the next round of stress tests in the first quarter, Goldberg expects Wells Fargo to be approved by the Fed to raise its quarterly dividend by another four cents, and be approved for $6 billion in share buybacks through the first quarter of 2014.

Goldberg rates Wells Fargo "Overweight," with a price target of $42.00.

WFC Chart WFC data by YCharts

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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