TAKING STOCK

You should be able to bank on Wachovia

by Malcolm Berko

Dear Mr. Berko:

My broker wants me to buy 300 shares ($10,000 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 problems and how this will affect WB's profits for the next couple of years. Last December on your recommendation, I sold 600 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-$27.37) recommendation is, indubitably, a winner.

Thanks to the traders at Merrill, 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.

WB made 3 cents 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 its 2005 acquisition of Golden West Financial, WB's real estate mortgages now represent 51 percent of it $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 over $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 U.S. which should rapidly expand its top and bottom line.

Wachovia trades about 10 points below its $38.05 book value, its $2.56 dividend yields a sweet 8.95 percent and the stock is trading at less than 7.75 times this year's expected earnings of $3.56 and just seven times projected 2009 earning of $4.10 a share. And several Wachovia watchers believe that there's a possibility of a modest dividend increase this year and a certainty of a good dividend increase in 2009.