Would Warren Buffett Buy 10% of Wells Fargo Today?

Markets Motley Fool

Warren Buffett has made it clear that he isn't abandoning Wells Fargo (NYSE: WFC) despite all of the trouble the bank has gotten into of late. But that shouldn't be interpreted as a signal for other investors to buy its stock.

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I'd even go so far as to argue that Buffett wouldn't think about making as substantial of an investment (based on ownership percentage) in Wells Fargo today as he did in the early 1990s, when he accumulated Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) stake in the bank.

This isn't solely because of the scandals that have come to light at Wells Fargo over the past year.

The first was its fake-account scandal, revealed by the Consumer Financial Protection Bureau last September, in which thousands of its employees opened millions of accounts for customers without those customers' permission.

The second major scandal at Wells Fargo that came out more recently was similar in nature, but instead of opening new checking or credit card accounts for customers, the bank illicitly signed up nearly a half million of them for car insurance they didn't need.

Buffett has dealt with scandals at Berkshire Hathaway's investments in the past, and he isn't a fan of them. Here's an excerpt from his opening testimony before Congress in 1991 when he discussed a bond-market scandal at Salomon Brothers:

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I want the right words and I want the full range of internal controls. But I also have asked every Salomon employee to be his or her own compliance officer. After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter. If they follow this test, they need not fear my other message to them: Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.

Yet, even though Wells Fargo hasn't lived up to this test over the past decade or so, this still isn't the primary reason Buffett would likely steer away from buying a large stake in it today.

The most important reason is instead that Wells Fargo is a lot more expensive today than it was in 1989 and 1990, the years Berkshire Hathaway amassed its 10% stake in the California-based bank.

As Buffett explained in his 1990 shareholder letter:

Our purchases of Wells Fargo in 1990 were helped by a chaotic market in bank stocks. The disarray was appropriate: Month by month the foolish loan decisions of once well-regarded banks were put on public display. As one huge loss after another was unveiled -- often on the heels of managerial assurances that all was well -- investors understandably concluded that no bank's numbers were to be trusted. Aided by their flight from bank stocks, we purchased our 10% interest in Wells Fargo for $290 million, less than five times after-tax earnings, and less than three times pre-tax earnings.

It's the final sentence that's so important because it allows you to compare what Berkshire paid for Wells Fargo in 1990 versus what it would have to pay today. And as you can see in the table below, the bank is a much less attractive proposition at today's price.

Time Period

Multiple to Pre-Tax Earnings

Multiple to After-Tax Earnings

1990

<3x

<5x

Today

8x

11.7x

All this aside, despite Wells Fargo's recent problems -- which will undoubtedly impact its rate of growth over the long run -- investors in the bank can continue to rest easy in the fact that Buffett still has confidence in the bank and has said publicly that Berkshire will carry on as one of its loyal investors.

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John Maxfield owns shares of Wells Fargo. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.