US Bank Continues Its Winning Ways

02/06/2012 3:15 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

By picking up competitors at depressed prices, the bank is leveraging its strength smartly for the long term, writes MoneyShow’s Jim Jubak, who also writes for Jubak’s Picks.

US Bancorp (USB) continues to gain market share from both acquisitions and internal growth. (The stock is a member of my Jubak’s Picks portfolio.)

The latest acquisition, announced on January 30, is the purchase of BankEast in a deal coordinated by the FDIC after the Tennessee bank was shut by regulators.

It’s a small deal, with US Bancorp getting ten branches in the Knoxville area, $272 million in assets, and $268 million in deposits. But the price was right (a $68 million discount to total assets) and the acquisition fills a hole in the bank’s Tennessee business.

The deal is of a piece with the bank’s strategy of using its post-Lehman relative strength to build its footprint at attractive prices.

You could also see that strength in the bank’s fourth-quarter report of internal growth. Average loans in the quarter climbed by 5.9% year over year and 10% from the third quarter. Commercial loans grew by 16% year to year, and residential mortgage loans were up 22% year to year.

For the quarter, earnings came to 64 cents a share, excluding 5 cents a share in non-recurring items. That was a penny above the Wall Street consensus. Revenue climbed by 8.1% year to year. Return on equity was better than 16%.

The bank also finished the quarter with a Tier 1 common equity ratio of 8.2% under Basel III guidelines. That’s well above the 7% minimum under the Basel III rules.

Not that US Bancorp was exempt from all the problems facing the banking sector. For example, the bank’s net interest margin did fall as the bank added to its investment portfolio, but at lower yields, thanks to the Federal Reserve’s continued policy of extended exceptionally low interest rates.

But net interest margins fell by just 0.05 percentage points from the third quarter, to a still healthy 3.6%.

The biggest question surrounding the stock right now is, when will the bank increase its dividend payout? In 2007—before the global financial crisis—the bank paid out 67% of earnings to shareholders in the form of dividends and share buybacks. In the fourth quarter of 2011, that payout ratio was just 29%.

“Raising the dividend remains a top priority for this management team,” CEO Richard Davis said in the bank’s conference call. The long-term goal, Davis added, is to raise the payout ratio to 60% to 80%.

The bank has applied to the Federal Reserve for approval to raise its dividend. (The bank’s shares currently yield 1.8%. The record date for the most recent dividend was January 17.)

I’m keeping my target price at $33 by October 2012. That would be a gain of 13.2%—plus whatever dividend these shares pay. The Wall Street consensus calls for 17% earnings growth in 2012, which would put the forward price-to-earnings ratio on those projected earnings at ten or so.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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