U.S. Bancorp (USB) is a “super regional” bank holding company with more than $600 billion in assets, which makes it the fifth-largest bank in the U.S. in terms of asset size, notes Hilary Kramer, editor of Value Authority.
The majority of its more than 3,000 branches are located in 25 states in the Midwest and West and operate under the name U.S. Bank. In the third quarter of this year, interest income, net of bad expense, accounted for 58.3% of the company’s revenues. Other services, outlined above, contributed the remaining 41.7%.
We added USB to the Buy List because the stock does not trade far from where it did in the middle of last decade. However, its earnings power is much higher now (total loans of $337 billion currently as opposed to $254 billion at the end of the third quarter of 2015), and the company has not had any significant credit issues since the financial crisis.
Concerns about a potential recession are the reason for the current depressed stock price, with the stock down from its January high of $63.57. However, I believe a mild to moderate recession, which may trim annual EPS by $1.00 a share, is largely discounted in the current stock price.
Meanwhile, the company is benefitting significantly from the higher short-term interest rates that have been engineered by the Federal Reserve this year. Net interest income of $3.8 billion in the third quarter was up 20.5% from the third quarter of last year and up 10.2% from the second quarter this year.
With rates going higher, and the company’s loan balance up 15% from the prior year, net interest income is also poised to move higher. Higher net interest income, along with stable results in the company’s other businesses, will likely allow EPS to move higher in coming quarters.
From a base of $1.16 in the current quarter, which included a $362 million provision in loan losses, EPS between $4.80 and $5.00 next year appears to be very realistic, even if credit costs continue to rise. At just over 8X expected EPS, with an attractive dividend yield of 4.5%, the stock is a solid buy here.
Overall, USB is well-run bank with a strong franchise in the markets it serves. The stock has not bounced as strongly as other banks in the recent market rally, which I attribute to the company being unable to buy back stock for the next year due to its pending acquisition of California based MUFG bank for $8 billion. However, I do not view this as an intermediate- to long-term restriction on stock performance. USB is a buy below $44. My target is $49.
