Wells Fargo & Co. (NYSE:WFC ) is a household name in the United States, and is one of the largest banks in the world. The company is a nationwide diversified financial services company with $1.7T in assets. Founded in 1852, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance services through more than 8,700 locations, more than 12,500 ATMs, online, and mobile devices.

Wells Fargo was rated as the 8th biggest public company in the world by Forbes in 2014, and 29th biggest company by revenue in the U.S. by Fortune Magazine. The company is the largest retail mortgage lender and mortgage servicer.

The bank underwent a lot of stress during the financial crisis, and as other banks started going under, saw tremendous support from Warren Buffett who invested in it. Since then, Wells Fargo has been the largest holding in Berkshire Hathaway valuing over $23B, which amounts to a 9% stake in the company.

According to the 2013 annual report, the companys operating segment net interest income is broken down as shown in the chart below.

For any investor across the world, the U.S. market is one of the best markets to invest in right now. The U.S. consumers are strong and resilient and investing in Wells Fargo provides an investor with a fantastic opportunity to bet on the bright American future. An additional incentive for the international investor is the strong U.S. dollar, which is in the nascent stages of a bull market, according to some analysts. While the initial share price is a bit more dearer for purchasing, the continued dividends over the years will be fueled by the same strong earnings power of the U.S. dollar.

Dividend Stock Analysis

Financials

Expected. A growing revenue, earnings per share and free cash flow year-over-year looking at a 10-year trend.

Actual. Wells Fargo dealt with the crisis and came out stronger than ever and now holds the #1 spot as the largest retail mortgage lender and servicer in the U.S. That has bode very well for the revenues and the incomes over the years. The stress that the company went under during the crisis saw the company liquidated with more shares that resulted in an initial bump in the revenue per share, but later dropped and stabilized. The return on equity is 13.68%.

Dividends and Payout Ratios

Expected. A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low EPS and FCF payout ratios to indicate that the dividends can be raised comfortably in the future.

Actual. Due to the stress during the financial crisis, the dividend had to be cut significantly, but since then the dividends have started rising again. And fast. The company now has a track record of raising dividends for 4 consecutive years with the last increase coming in March 2014 with a 16.7% increase. The next dividend increase announcement is imminent.

Outstanding Shares

Expected. Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble.

Actual. After the financial crisis, the company was liquidated with more shares issued. However, that is in the past now and the company has stabilized with flat amount of shares since 2011, with a very slight decrease in 2014.

Book Value and Book Value Growth

Expected. Growing book value per share. Sometimes stock repurchases are authorized by the board to reward management at the expense of book value.

Actual. Book value has continued to grow over the years and maintains an impressive upward trend.

Valuation

To determine the valuation, I use the Graham Number, Average Price-to-Earnings, Average Yield, Average Price-to-Sales, Dividend Discount (Gordon Growth model) and Discounted Cash Flow. For details on the methodology, click here .

The Graham Number for WFC with a book value per share of $32.06 and ttm EPS of $4.1 is $54.38.

WFCs 5-year average P/E is 12.43 and the 10-year average P/E is 14.7. Based on the analyst earnings estimate of $4.55, we get a fair value of $56.56 (based on 5-year average) and $66.89 (based on 10-year average).

WFCs average yield over the past five years was 3.69% and past ten years was 5.57%. Based on the current annual payout of $1.40, that gives us a fair value of $37.94 and $25.13 over the 5- and 10-year period, respectively.

The average 5-year P/S is 2.02 and average 10-year P/S is 2.4. Revenue estimates for next year stand at $17.46 per share, giving a fair value of $35.27 and $41.90 based on 5- and 10-year averages, respectively.

The Gordon Growth Model is a quick way to calculate the fair value of a company using the current dividend, the expected dividend growth rate, and our required rate of return or discount rate. Using an expected rate of return of 10%, and a dividend growth rate of 7% (a very modest estimate considering WFCs recent history of raising dividends), we get a fair value of $51.33.

The consensus from analysts is that earnings will rise at 9.7% per year over the next five years. If we take a more conservative number (two-thirds of the estimate) at 6.47%, and assume that WFC is growing its earnings by 5% thereafter, running the three-stage DCF analysis with a 10% discount rate (expected rate of return), we get a fair price of $91.74.

Conclusion

Wells Fargo & Co. went through financial stress during the crisis. However, it came out on top and now holds the #1 spot as Americas largest retail mortgage lender and servicer. The company is the largest holding of Berkshire Hathaway, which owns 9% of the company and continues to be a great performer. The company is currently fairly valued with most valuations pointing to a stable outlook. In this frothy market, where value is hard to find, Wells Fargo provides a great opportunity at a fair value. If we give equal weights to all valuation metrics used above, we get a fair value of $51.24 which is approximately 6% under the current trading stock price.

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