Thursday, April 10, 2008

USB Dividend Analysis

U.S. Bancorp operates as the holding company for U.S. Bank that provides commercial banking and financial services in the United States. It generates various deposit products, including checking accounts, savings accounts, money market savings, and time certificates of deposit accounts.

It is a dividend aristocrat as well as a major component of the S&P 500 index. It has been increasing its dividends for the past 36 consecutive years. One of USB’s stockholders is no other than the Oracle of Omaha, one of the best investors in the world. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 4.60 % to its shareholders. The stock has been trading in a range over the past decade.

At the same time company has managed to deliver a 9.30% average annual increase in its EPS since 1998.

The ROE has been stable above 18% in all years except 2001.

Annual dividend payments have increased over the past 10 years by an average of 12.70% annually, which is significantly above the growth in EPS. A 12.7 % growth in dividends translates into the dividend payment doubling almost every 6 years. If we look at historical data, going as far back as 1992, USB has actually managed to double its dividend payments every five years. The company last increased its dividend in 2007 by 6.25%.

If we invested $100,000 in USB on December 31, 1997 we would have bought 2680 shares (Adjusted for a 3:1 stock split in May 1998). In February 1998 your quarterly dividend income would have been $370.75. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1576.75 by December 2007. For a period of 10 years, your quarterly dividend income has increased by 207 %. If you reinvested it though, your quarterly dividend income would have increased by 331%.

The dividend payout has increased from 50% in 1998 to more than 65% by the end of the study period. It has remained over 50% for the majority of the study period. A payout above 50% is a warning sign, since it leaves dividends exposed to fluctuations in earnings. Over the past 10 years the stock returned 2.80% on average on each year after the payout was above 50%; the stock returned 12% on average after each year that the dividend payout was below 50%.

Currently, USB looks cheap with its low price/earnings multiple of 13.70 and above-average yield at 5.00%. The high dividend payout ratio however is a warning sign that dividend growth might be less spectacular in the future. I would consider initiating a small position in the bank. I would consider initiating a full position in USB when the payout falls below 50%.

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