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First of all, Warren Buffett, chairman of Berkshire Hathaway (BRK.A)(BRK.B), is gleefully optimistic about America. “Tomorrow’s always uncertain,” he said this morning on CNBC. “But the future, the longer future, is always very certain. And that’s what you have to keep your eye on.”
This attitude keeps Buffett building up huge stakes in companies he deems worthy in the best and worst of times. But what makes Buffett choose the companies to begin with? There is evidence in the stock he keeps adding the most to: Wells Fargo (WFC).
Wells Fargo has merited membership in Warren Buffett’s portfolio since the 1990s, a shining representation of his long-term philosophy. A steady trend since the first quarter of 2009 is apparent: continual buying. The investor bought 119,940,333 shares cumulatively from then through the third quarter of 2012. This placed him at a total position size of more than 422 million shares.
Wells Fargo was one of Buffett’s “three important moves” in his portfolio in 2011, along with purchases of IBM (IBM) and Bank of America (BAC). He cited several reasons why in his annual letter: “The banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels.”
Wells Fargo is also massive – it serves one in three households in the U.S. through its more than 9,000 shares, 12,000 ATMS and website, in more than 35 countries. Though it ranked fourth in assets, it is also the first in market value of its common stock of all U.S. banks.
Though Buffett requires a high ROA at a bank, he also insists that it be achieved conservatively. On that front, Wells maintains a well-controlled operating environment. It has established ground rules for extending credit to help it manage credit risk, and closely monitors the performance of its loan portfolio. It also keeps its interest rate and market risks in its asset and liability balances within set ranges, while concurrently enabling ample liquidity and capital levels to fuel growth.
Additionally, Wells continues to slough nonperforming loans from its assets. Loans 90 days or more past due totaled $1.5 billion in the third quarter, as opposed to $2 billion at year-end 2011.
Similarly, it fortified its capital position. Equity in the third quarter increased $6.6 million from the second quarter to $156.1 billion. Its Tier 1 common equity under Basel I reached $105.8 billion, equal to 9.9% of risk-weighted assets. Wells also boasts a Tier 1 capital ratio of 11.5%, total capital ratio of 14.51% and Tier 1 leverage ratio of 9.4% to end the third quarter.
Other third quarter results were a testament to its gathering strength and ability to withstand economic uncertainty. The bank reported $4.9 billion in earnings, compared to $4.1 billion at the same time last year. The year’s improvements were spurred largely by balanced net interest and fee income, diversified sources of fee income, a diversified loan portfolio and strong underlying credit performance, as well as growth across many of its businesses.
Third quarter revenue bounded to $21.2 billion from $19.6 billion at the same time last year. The revenue increase came primarily from noninterest income growth in mortgage banking, combined with a mild increase in net interest income. The bank originated 56% more loans in the third quarter from a year ago.
During the quarter, it bought back about 17 million shares and paid a 22 cent dividend, up from 12 cents a year previously. Buffett predicted the dividend increase in his 2010 letter, saying he expected his largest dividend gain to come from Wells Fargo, which was forced to lower it though it was “consistently prospering throughout the worst of the recession.”
Buffett seemed to know based on its fundamentals and execution strategy that Wells Fargo would come through any economic environment – he made his largest purchases in the past five years on its biggest stock dips, in the first quarter of 2009, third quarter of 2009 and third quarter of 2010. But he has been making his boldest purchases over the past year, as the stock has climbed almost 23%.