Thursday, September 26, 2019

U.S. Bancorp (USB) Dividend Stock Analysis

U.S. Bancorp (USB) is a financial services holding company, which provides various financial services in the United States. It operates in five segments: Corporate and Commercial Banking, Consumer and Business Banking, Wealth Management and Investment Services, Payment Services, and Treasury and Corporate Support.

U.B. Bancorp has increased dividends for 9 years in a row. It just recently raised its quarterly dividend last week by 13% to 42 cents/share – just half a cent below the highest dividend from before the financial crisis. The company lost its status of a dividend aristocrat during the financial crisis, after accepting TARP money and cutting dividends from 42.50 cents/share to 5 cents/share. It resumed growing the dividend from a low base in 2011, and as the regulation restrictions have come off a little bit, it has room for an above average dividend growth.

Earnings per share have increased from $1.62/share in 2008 to $4.14/share in 2018. U.S. Bancorp is expected to generate $4.29/share in 2019. For reference, peak earnings per share prior to the financial crisis hit $2.61/share in 2006. Earnings per share decline to 97 cents/share in 2009, before rebounding. This just goes to show that the bank has generated higher earnings and is more valuable than before the crisis. Further, it kept profitability every quarter during the crisis, which is a testament to its diversified revenue base, and conservative underwriting standards.

During the next recession, we will likely see a decline in earnings per share, likely triggered by a larger provision for credit losses. The strong underwriting culture will balance any losses and keep them from getting too excessive during the next crisis.

Closing unprofitable and underperforming branches will increase efficiency and cut costs, which could translate into higher profits. An increase in online banking could require a smaller retail footprint, which could reduce operating costs. On the other hand, in order to be successful in digital, companies like U.S Bancorp need to invest in its technology. Furthermore, a reduction in the number of branches could be bad for building and maintaining long-term relationships with customers. The increase in online banking could also be a negative, given the rise in FinTech’s, and the fact that technology is increasingly making it easier for consumers to compare options. While inertia is a powerful force, I wonder whether consumers will be willing to stay put with a checking or savings account that doesn’t yield anything, when other alternative can provide better returns with a click of a button. I also wonder if consumers will stick to products that charge them a recurring monthly fee, instead of switching to the many low to no cost alternatives out there.

Growth in the economy will stimulate demand for new loans . While the net interest margins will fluctuate, I expect that a bank like USB with solid underwriting can manage to grow profits over time, through more loans and by utilizing its low cost depositors base.

U.S. Bank’s assortment of fee-income generating segments is more diverse than those of other banks. Examples includes payments, trust services, investments services and mortgage banking. This makes US Bank somewhat less dependent on net interest income for revenues.

U.S. Bank profits from its position in payments services, which provides a stream of income that more recurring type in nature. This includes credit and debit cards, merchant processing and corporate payment products. These are highly scalable as a business.

Trust services and wealth management services are another more stable business model with a recurring revenue stream characteristic, which can insulate somewhat the income statement from the ups and downs of the credit cycle.

The dividend payout ratio was at 105% in 2008, just prior to the dividend cuts in 2009. The payout ratio dropped to 21% and then even further to 12% as profits started rebounding. Since 2012/2013, the dividend payout ratio has remained around 30%. While U.B. Bancorp also prioritizes share buybacks, I believe that the payout ratio can increase a notch over the next decade. A lower payout ratio is a good cushion against steep drops in earnings that we will experience during the next recession. This minimizes the chance of another dividend cut, though it doesn’t eliminate it. Even if the payout ratio stays around 30%, pure earnings growth could deliver growth in distributions to patient stockholders.

During the financial crisis, the number of shares outstanding increased. However, since 2010, U.S. Bancorp has steadily repurchased shares. As a result, the number of outstanding shares has decreased by 16%. There will be more funds for share buybacks going forward, which would boost earnings per share. The added boost to earnings per share could also provide a continued boost to dividends per share (given a flat payout ratio).

U.S. Bancorp (USB) is attractively valued at 13 times forward earnings and offers a current yield of 3%, which is well covered by its strong and diversified earnings base.

Relevant Articles:

USB Dividend Analysis
US Bancorp (USB) cuts its dividend by 88%
Don’t chase High Yielding Stocks Blindly
Dividend Investing During the Financial Crisis
Six things I learned from the financial crisis

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