RICK HELM
PORTFOLIO MANAGER
COHEN AND STEERS DIVIDEND
VALUE FUND

COMPANY: Wells Fargo
TICKER: WFC (NYSE)
PRICE: $65.37 (as of 4 p.m. yesterday)
52-WEEK RANGE: $57.62-$65.42
MARKET CAPITALIZATION: $109.5 billion

Rick Helm is the portfolio manager of the Cohen and Steers Dividend Value Fund (DVFAX). Wells Fargo is a diversified financial services company based in California. Mr. Helm spoke to David Dalley of The New York Sun about why he expects the company’s stock to increase by about 16% per annum over the next three years.

What does Wells Fargo do?

They’re a bank. They’re not quite a national platform bank,not at the same level as Citigroup or Bank of America, but they’re very strong in the western U.S. They were formed by the 1998 merger between Norwest and the old Wells Fargo.

Why do you like the stock?

Our focus is on dividend growth. We operate on the value end. We’re not necessarily looking for a high absolute yield, but we want companies with a history of strong dividend growth and the cash flow to support future dividend growth.

In the case of Wells Fargo, not only have they been able to compound their dividend at a rate of 17.3% per year over the last five years, but their yield is currently at about 3.14%. The indicated yield for the next 12 months is about 3.2%. They’re higher than the S&P, which yields about 1.8%. They’re higher than the average of the financial services sector, too, which is at about 2.5%. They are also reinvesting back into the business, so they’re able to grow it at the same time.

What are the fundamentals like?

Their valuation is very attractive to us. They’re trading at 14.5 times trailing, and 13 times forward earnings. That compares favorably to the S&P, which is at 18 times trailing and 15.4 times forward earnings.

They’re at 2.7 times book value, which is about in line with the S&P. So it’s attractive from a value perspective, it has a high-yield, strong-dividend growth, and it has forecast earnings growth in the double digits over the next three years.

They’re returning 14% on a total return basis, which is great for what is a very stable and well-run organization. A banking stock is a lot less risky, after all, than many other kinds of stocks. So from a risk adjusted basis, it’s very attractive.

What will drive growth going forward?

Their real strength is in consumer and small business lending. They’re one of the leaders in that field.They’re very good at offering a full suite of services to small business owners, and that has driven a lot of their growth.

Their loan growth has been 17% per year over the last six years. If you look at 2005, overall loan growth was 10%. But if you take out residential real estate, it was 20%. Residential real estate lending is slowing, but those numbers demonstrate very strong loan growth in non-real estate lending, and that’s very attractive.

Why is now the time to get in?

You’re starting to see some life now in financial services companies generally.As the market begins to appreciate that we’re nearing the end of the Fed’s rate increases, and that the upward pressure on interest rates is easing, then financials, which typically are punished in a rate-raising environment, will rally, and that’s part of what will drive the stock up.

What’s your price target?

We use a forward-looking dividend discount model, and our target price is about $102 per share.We think it should reach that level over the next two to three years. Over three years that’s 16% per annum, which is very reasonable for a company with earnings growth, conservatively, of about 11% per year.