U.S. Bancorp: A Stock For Solid Long-Term Growth
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Approximately two years after it hit rock bottom, U.S. Bancorp (NYSE: USB) is back on track. This is in spite of all the hurdles that have hit the financial and banking sectors after the Great Recession of 2008. The image of U.S. Bancorp now is much different than it was in 2008. One could argue the company learned a hard lesson in 2008, and consequently placed capital levels among its highest priorities. In addition, it is believed that U.S. Bancorp is already in complete compliance with Basel III banking requirements. Analysts cite this among a growing list of reasons to expect U.S. Bancorp to succeed. You need look no further than its stock price of around $30, which is over $9 higher than its lowest point last year.
U.S. Bancorp’s actions confirm this, as last month it announced a 56% increase in quarterly dividends along with a 100 million share repurchase program. I believe this can only add to current investor confidence in the company.
Unfortunately, the hurdles facing U.S. Bancorp are olympian in scale. First, fee growth, of which Bank of America (NYSE: BAC) took tremendous heat for, has slowed. In an industry that draws large amounts of its revenues from fees, this is quite a set-back.
The biggest hurdle however is the macroeconomic environment. Due to a slow economic recovery, U.S. Bancorp’s stock has been lowered from outperform to neutral. Due to a slower economy, its revenue expectations have been revised down. Also, the sluggish fee grow that I mentioned is due in part to the sluggish economy. It seems that for U.S. Bancorp to do well, everyone needs to do well. With that said, don’t expect U.S. Bancorp to wait for the economy to increase its profits. Recently, it announced an iPhone application for Ace Hardware credit cards. This will make it easier to attract new customers and generate more revenue from credit cards. I imagine that Ace Hardware is merely the first company to get this iPhone application and if the arrangement works out with Ace Hardware, expect U.S. Bancorp to establish many partnerships like this.
In addition to the partnership with Ace Hardware, U.S. Bancorp is now the first bank nationwide to offer FreeMonee Gifts. The program is in partnership with FreeMonee Network and will offer US Bank customers a chance to earn money back rewards with purchases from selected merchants. The program seeks to reward loyal US Bank customers and also to establish the banks reputation as a bank that gives back; a strategy that could prove popular considering the poor economical situation at large.
Of course we can’t talk about the banking sector without mentioning its public image. Although the banking industry has been the subject of intense focus, U.S. Bancorp has managed to keep out of the limelight relative to other, larger banks. Experts have noted that U.S. banks have changed little since the financial collapse in 2008. Notably, U.S. Bancorp is in the article, but is not mentioned in conjunction with its larger competitors. This is typical. Scrutiny has been focused mainly on the largest banks like JP Morgan Chase, Bank of America, and Wells Fargo. Since U.S. Bancorp has been the quickest to comply with new governmental regulations, it has seemingly been rewarded by staying out of the press.
Speaking of other banks, U.S. Bancorp will be facing very stiff competition into the distant future. PNC Financial Services Group (NYSE: PNC) is also poised to do very well in the coming years. In fact, it too has announced a dividend increase and a massive share buyback. This will no doubt increase investors’ confidence in PNC stock, which is already about $62 per share.
Additionally, JP Morgan has met many of the same regulatory requirements as U.S. Bancorp. For a bank that is about three times the size of U.S. Bancorp, this is a big deal. If JP Morgan follows through on its commitment to increase transparency, its better image could lessen the effects of U.S. Bancorp improving its own image. Either way, everyone who uses a bank would benefit from this.
On the bright side, don’t expect Bank of America to be a strong competitor. Beginning in the financial crisis, Bank of America has seemingly made every big mistake it could make. Not only did it make the mistake of purchasing investment bank Merrill Lynch, but it recently bought China Construction Bank, a deal that Forbes believes is awful. Due in part to these bad acquisitions, I am not surprised to see Bank of America have one of the highest percent declines when the Dow declines. With a stock price of about $8, one wonders if Bank of America is in need of a makeover.
Even though there is a lot of competition in the banking sector, I would not worry about how it affects U.S. Bancorp. After the financial collapse, it has strived to carve out its own chunk of the market, and is now poised for growth in both its traditional revenues and in new areas of revenue. You will not have to wait for the economy to grow to see U.S. Bancorp grow.
Again, analysts are keeping U.S. Bancorp as a hold for now. I would not worry about this as an indicator of U.S. Bancorp stock. At the very least, its stock is very safe at the moment, and analysts expect to hear good things when the company announces its first quarter earnings. Barring an unexpected economic collapse, U.S. Bancorp can only grow. I would keep an eye on key economic indicators, including housing. If you start to see that market rebounding strongly, it might be time to revisit U.S. Bancorp. I expect giving it this second look will be time well spent.
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