Buffett hitched wagon to this stock — and it's delivering

Sizable bet on Wells Fargo looking like a flat-out winner; 'Mae West was right'

Mar 11, 2013 @ 9:42 am

Wells Fargo & Co. (WFC), the largest U.S. mortgage lender, climbed to a 4-year high, increasing the value of Berkshire Hathaway Inc. (BRK/A)'s stake to more than $16 billion.

The bank climbed less than 1 percent to close at $36.50 in New York. Earlier, it hit $36.62, the highest since October 2008. At that price, Omaha, Nebraska-based Berkshire's 456.2 million shares held at Dec. 31 are worth $16.7 billion.

“Mae West had it right: 'Too much of a good thing can be wonderful,'” Buffett wrote in his annual letter to Berkshire shareholders March 1, referring to the late Hollywood actress and comedienne.

The three other stocks in Buffett's “big four” are International Business Machines Corp., Coca-Cola Co. (KO) and American Express Co. (AXP)

Wells Fargo posted record profit of $18.9 billion last year, helped by a boom in home-loan refinancing. The bank has been taking a greater share of mortgage and commercial markets while betting on an economic turnaround in the U.S.

Last year, Wells Fargo bought back more than $3.8 billion of shares and increased its quarterly dividend to 22 cents a share from 12 cents. The bank raised its quarterly dividend again in January to 25 cents a share.

Distributing Capital

“It's very important in this environment to continue to increase the amount of capital distribution that we are providing to our shareholders,” Chief Financial Officer Timothy J. Sloan said at a Feb. 13 investor conference in Miami.

Berkshire has increased its stake in the lender in nine of the past 10 quarters. Buffett said in the letter that his company's rising share of the bank's equity entitles Berkshire to a greater slice of its future earnings.

The stream of profit from Wells Fargo and the three other largest holdings don't immediately get paid to Berkshire through dividends, he wrote. Still, the gains are “every bit as valuable” to Berkshire shareholders, Buffett said.

The fact that Buffett held onto his stake, even as Wells Fargo plunged about 80 percent from September 2008 to March of the following year amid the credit crisis, shows conviction, said David Kass, a professor at the University of Maryland's Robert H. Smith School of Business who has accompanied students to meet the billionaire in Omaha.

“That requires nerves of steel,” he said in a phone interview. Buffett had confidence that “the U.S. economy would come back and, with the U.S. economy, so would Wells Fargo.”

--Bloomberg News--


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