Why US Bancorp Should be in Your Retirement Portfolio
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Note: The original version of this story incorrectly stated that U.S. Bancorp's assets total $3.4 billion. The correct figure for U.S. Bancorp's assets is $340 billion. The post has been updated to reflect this change.
The Boundary Waters Canoe Area (BWCA) in Northern Minnesota suffered tremendous forest fires in 2007 and 2011. Already though, new forest growth is vigorous and by most accounts, the BWCA is generating new tree growth, a healthy wildlife mix and a bounty of recreational opportunities.
US Bancorp (NYSE: USB), based in Minneapolis, weathered the 2007-2010 financial firestorms in likewise fashion and shows renewed vigor and growth in 2012.
Perhaps its distance from the Wall Street greed swamp factors into its growing success: Who knows? We do know that it now stands as one of the five biggest retail banks in the U.S. and has a stated goal of continuing to grow through acquisitions and organic growth.
But let’s be fair. It substantially trails the other four largest banks in assets. As of March 31,2012 US Bancorp had assets of $340 billion compared to $2.3 trillion for JP Morgan Chase (NYSE: JPM); $2.1 trillion for Bank of America (NYSE: BAC) $1.9 trillion for Citibank (NYSE: C), and $1.3 trillion for Wells Fargo (NYSE: WFC).
U.S. Bancorp avoided much of the recent financial debacle by not diving neck deep into subprime loans and shaky derivatives in the first place. It has largely avoided mortgage-backed securities litigation, unlike its competitors JP Morgan, Citibank and Bank of America. It also has no exposure in Europe.
Financials reflect the improving health of US Bancorp. It is trading at or near its 52 week high of $32.23 price per share. First quarter earnings per share (67 cents) were three cents ahead of most analyst expectations. It recently launched a $100 million stock repurchase plan and shows a healthy dividend increase of 56% (78 cents per share).
It clearly avoided the worst practices of real estate lending of recent years and most recently passed the stress test with flying colors. It was among the first banks to repay the Treasury for TARP loans. Historical stock prices show that US Bancorp did not fall nearly as far, percentage wise, as other large banks.
I believe this stock is a value play for several reasons:
Regional Focus: US Bancorp is a solid, conservative Midwestern bank, with branch locations stretching north to Canada and to the Mexican border in the south. The resurgence of agriculture, mining, oil and the relative health of the Midwest economy will continue for some time. Unemployment is down from a year ago for all 12 Midwest states. Further, real estate prices in the Midwest didn’t spike very high and thus have fallen less than other regions.
Management: Most of the senior executives have been with US Bancorp or its acquired companies for many years. CEO Richard K Davis has been with the company for almost 20 years. A Facebook search of Davis came up empty, and the corporate Facebook page has a mere 118 “friends”. Trendy it is not. In banking at least, that is a good thing.
Growth Strategy: Future growth will be driven by acquisitions of failed - or failing - small institutions in close or existing markets. Its recent purchase from the FDIC of BankEast illustrates this. Tennessee-based BankEast was shut down by state regulators on a Friday and reopened its 10 branches as US Bank on the following Monday. It had $268 million in deposits. US Bancorp has been expanding steadily westward as well, notably in Oregon and Washington State.
Analyst View: Many analysts have downgraded US Bancorp to “hold” given its stock price relative to its 52-week high (it closed recently at that level), and a belief that Wells Fargo is a better bank value. For my money, I’ll go with Warren Buffet, whose Berkshire Hathaway holding company has $1.9 billion invested in US Bancorp. I believe the stock analysts have been biased against financial institutions for as long as I have been in the business (a long time indeed). Banks are typically a buy and hold stock, another reason they are not favored by analysts paid by stock traders.
A note of caution: US Bancorp is trading at a premium. Its price to earnings ratio of 12.40 is a full point higher than the average of the other four biggest retail U.S. banks
My View: Banks don’t sell smartphones, trendy athletic footware, or shiny new cars in flashy showrooms. They typically avoid the limelight. Yes, their customer service is horrific, but my point is that they are in the business of selling complex financial instruments that the average investor doesn’t understand or frankly, doesn’t need to understand.
Rather than sitting in some 50-story office surrounded by flashing computer screens and mountains of charts and graphs, analysts would be better off purchasing a plane ticket and renting a hotel room near the institution. Meeting with executives and employees would be a better way to value a bank. Let’s call it Valuating Banks by Walking Around (apologies to Tom Peters).
I’m going to let you in on a little-known secret of investing. Mutual funds, which own most stocks, have something called “Investment Objective”. Most domestic large cap funds require a healthy dose of exposure in financials. Mutual fund managers, faced with limited upside potential and speculative risk for large U.S. banks such as Citibank, Bank of America and JP MorganChase, hold their nose and buy US Bancorp. This will continue to serve as a strong demand base for some time to come.
Bank bashing remains a blood sport in the media. Barely a day goes by without a smack down against Citibank, JP Chase and the biggest villain of them all, Bank of America. There are also some hilarious cartoons to view on the internet.
US Bancorp should also be lauded for its commitment to hiring veterans in the U.S. Chamber of Commerce’s “Hiring Heroes” program
Solid management, geographic location, liquidity for acquisitions, a generally bullish outlook for financials, and low levels of bad loans make this an attractive long-term buy. Unlike its competitors, there are likely few surprises ahead for US Bancorp.
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