Our latest featured income recommendation is the country’s fifth-largest bank, explains Chloe Lutts Jensen, in Cabot Dividend Investor.
Minneapolis, Minnesota-based US Bancorp (USB) came through the financial crisis in much better shape than most banks, thanks to good management and the high average credit quality of its loan portfolio.
In the seven years since, the bank has increased its Tier 1 capital reserves, maintained the high credit quality of its debt portfolio, and grown both shareholder equity and EPS every year.
Essentially the only metrics on which performance has not improved every year since 2010 are US Bancorp’s return on assets and net interest margin.
Both have been dragged down by the decline in interest rates since the beginning of 2014, which lower the returns available to USB on its investments and reserves.
With the Fed expected to begin raising interest rates as soon as September, and by Q1 2016 at the latest, management expects these returns to begin climbing soon.
Now is a good time to buy USB before the effect of rising rates begins to show up in the numbers and the charts.
While rising interest rates will be a major driver of income growth at USB over the next year-plus, the bank’s revenue model is an example of stability and reliability in the financial industry.
USB’s credit exposure is also diversified across a number of sectors, including consumer credit, agricultural credit, small business lending, mortgage lending, commercial real estate, and more.
Lastly, retail-banking deposits make up the majority of US Bancorp’s liabilities, at 78%, making for a very low cost of capital for the company.
This reliable revenue stream means reliable dividends for investors, with a few growth kickers.
US Bancorp slashed the dividend from $1.70 per year to $0.20 per year during the financial crisis. From the low in 2010, the dividend has grown by about 38% on average each year and currently yields 2.3%.
As rate hikes approach, bank stocks in general—and USB in particular—are likely to continue to outperform the market.
I am adding USB to the Dividend Growth tier of our model portfolio. Long- and medium-term investors with moderate risk tolerance can do the same.
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