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Wells Fargo or Well Fargo Jr.? Two Great Bank Stocks

Jeff Bailey

Warren Buffett’s smallish ($2.4 billion at cost) bet on U.S. Bancorp (USB) is looking better of late, with the regional banking concern’s stock price having recovered and risen above levels the Berkshire Hathaway (BRK-B) CEO paid.

The position is dwarfed by Buffett’s largest stock holding, Wells Fargo (WFC), which is carried at original cost of $10.9 billion and has a current market value of about $16.4 billion. It’s not hard to see why Berkshire bought some U.S. Bancorp: the company is remarkably similar to Wells Fargo with one crucial difference: it’s much smaller and thus has the potential to make acquisitions that, properly integrated, would make it even more profitable.

Return on assets in a great banking measurement, and these two kick the stuffing out of most the competition, as in JPMorgan (JPM), Bank of America (BAC) and Citigroup (NYSE:C):

USB Return on Assets Chart

Wells Fargo and its Mini-Me, U.S. Bancorp, have yet to return to top ROA form, but don’t believe for a minute that Dodd-Frank or much else will prevent them from doing so. They’re still trudging through some bad loans and such, but these companies are built on grueling incremental improvement in operations – selling one more service to each customer; getting one more transaction out of each employee. And they are lower-risk in their business profile, eschewing big trading positions, than the likes of JPMorgan and Citi.

Since the market’s bottom (remember Wells Fargo’s chairman, inquiring at an emergency meeting of banks and regulators why his institution had to take a bailout like its feeble competitors?), the two stocks have performed equally well, as seen in a stock chart.

USB Chart

Wells is a little cheaper – PE ratio of 10.7 vs. U.S. Bancorp’s PE ratio of 11.9. And Wells’ dividend yield is a tad richer – 2.8 vs. a dividend yield of 2.3 for U.S. Bancorp. But what we ought to care about is the potential for dividend growth, and they both have lots of room, regulators willing (and they will be; memories are short), to increase their payouts.

USB Payout Ratio TTM Chart

Buffett owns them because they’re well-run companies with great long-term prospects. Wells is better known. But as the smaller player, U.S. Bancorp may have more running room ahead.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.

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