You should be able to bank on Wachovia
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Dear Mr. Berko:
My broker wants me to buy 300 shares ($9,000 worth) of Wachovia, and I’m not really comfortable with this recommendation, and frankly I’m not really comfortable with my broker. But he said you know each other “pretty good” and recommended that I ask you what you think. He says that you will approve his Wachovia recommendation. Like most investors, I’m worried about the subprime and collateralized debt obligation (CDO) problems and how they will affect Wachovia’s profits for the next couple of years. Last December on your recommendation, I sold 600 shares of Microsoft at $35.20, and I would use half that money to buy Wachovia. What do you think?
S.R., Syracuse, N.Y.
Dear S.R.:
I remember meeting your broker a few years back when I spoke to an audience in Syracuse. That experience was enormously unpleasant. Anyhow, I must give credit where and when it’s due, and I think his Wachovia Corp. (WB-$27.87) recommendation is, indubitably, a winner.
Thanks to the traders at Merrill Lynch, Bear Stearns, etc., who made millions in commissions selling their toxic waste as triple-A quality, WB crashed from $58 all the way down to $23.77. WB has developed a reputation for “customer service,” an oxymoron at Bank of America, Wells Fargo and other banks whose local branches can’t be reached by telephone. WB recognizes that customer service is the keystone to profits, and that old-fashioned retail banking generates about 60 percent of total income.
Wachovia made 3 cents per share in its fourth quarter after taking $3.3 billion in write-downs and provisions for loan losses. There’s still about $2.4 billion of subprime and CDO exposure remaining, and WB will take the remaining write-offs this year.
Certainly the deteriorating home market will continue to affect WB’s earnings, and due to the company’s 2005 acquisition of Golden West Financial, real estate mortgages now represent 51 percent of its $450 billion loan portfolio. As a result, about 1.7 percent of this portfolio is in home equity loans with less than 10 percent equity. This is an $8 billion exposure, which is why WB’s stock is so cheap. However, there is some comfort. Back in the ’90s when California’s housing crisis was pandemic, Golden West’s losses peaked at just 0.18 percent of its total loans.
In spite of all the doom and ruin, WB has more than $7 billion of excess capital, its reputation for customer service is envied, its relationships with corporate accounts is unassailable, its trust department management is held in high esteem, and the October 2007 acquisition of A.G. Edwards makes WB the second-largest retail brokerage in the United States, which should rapidly expand its top and bottom lines.
Wachovia trades about 10 points below its $38.05 book value, its $2.56 dividend yields a sweet 9.12 percent and the stock is trading at less than 7.9 times this year’s expected earnings of $3.56 and just 6.8 times projected 2009 earning of $4.10 a share. Several Wachovia watchers believe there’s a possibility of a modest dividend increase this year and a certainty of a good dividend increase in 2009.
So I’m comfortable putting my imprimatur on that broker’s recommendation. The shares traded at a new low ($23.77) in March and it could fall back again if the market gets real nervous. However, last November William Goodwin, a Wachovia director, bought 500,000 shares at $38, bringing his total holdings to 1.5 million shares. And G. Kennedy Thompson (I’ve always been suspicious of people who use an initial for a first name), the chief executive officer, purchased 100,000 shares also in November 2007 at $39 and now owns 1 million shares. I think your timing is better.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.© Copley News Service
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