U.S. Bancorp: Downgrade To Hold As Earnings Drop Offset By Dividend Growth (NYSE:USB)

Company Snapshot

For today’s note I am traveling to the great American west again to revisit a bank stock I covered this August.

U.S. Bancorp (NYSE:USB) is a Minneapolis-based bank and some key facts about it are that it is listed #150 on the Fortune 500, has roots going back to 1863, trades on the NYSE, and has more than 2,000 branches in 26 states under the U.S. Bank brand. It has both a consumer as well as a business and institutional banking segment.

Since my last rating on Aug. 21st, when I gave it a strong buy, it has gone up over 7%:

In today’s note, I will apply an updated rating methodology and also use the most recent quarterly results, to see if my prior rating changes.

Total Rating Score

Based on the score total in the score matrix above, I’m rating this stock a hold.

This is a downgrade from my prior rating in September.

Comparing my rating to the consensus on Seeking Alpha today, my rating is aligned with the consensus from the SA quant system this time, which also gave it a hold:

Rating Methodology

My simplified and straightforward 8-point approach focuses on a few core areas such as revenue and earnings growth, dividend income opportunity, undervaluation opportunity, a share price presenting a value-buying potential, and identifying a key risk of the company as well as its potential impact to an investor.

Top-Line Revenue YoY Growth

I am looking for any positive revenue growth on a YoY basis, and here is what I found from the income statement:

In the quarter ending September it saw revenue of $6.48B vs $5.93B that same quarter a year prior, a 9% YoY growth.

One call out on the revenue side and what is driving it is interest income. If you contrast interest income of $7.7B in Q3 with $4.7B in that quarter a year ago, that is a 64% enhance.

advance, their total revenue projections for the upcoming Q4 results shows a potential slight revenue uptick, so that adds confidence to my hold thesis on this stock.

Net Income YoY Growth

I am looking for any positive net income growth on a YoY basis, and here is what I found, also from the income statement:

This September the firm achieved $1.52B in earnings vs $1.81B in the comparable quarter a year ago, a 16% YoY reject.

Important to refer about the last quarter is that the company took a charge related to its merger with Union Bank.

According to their Q3 earnings release:

Net income of $1,736 million and diluted earnings per common share of $1.05 as adjusted for merger and integration-related charges associated with the acquisition of MUFG Union Bank (“MUB”).

This is a short-term charge, and one should consider that for all of the last 8 quarters the bank has shown profitability. Nevertheless, mergers can come with costs but also risk so that is important to consider too.

I also should point out that despite interest income rising, so did interest expense, and in Q3 it grew to $3.5B from just $901MM in the prior year quarter, which is over 200% enhance. So, regardless of the merger costs, the impact of higher interest expense certainly can be felt.

For that reason, I am bearish on its earnings results and looking ahead I think the high interest costs will continue until the Fed starts dropping its policy rate. As of now, CME Fedwatch projects the rate staying the same after the December meeting.

Dividend 10 Year Growth

I am looking for dividend 10 year growth trends, and here is what I found:

The annual dividend went from $0.89 in 2013 to $1.88 in 2022, a 53% growth over 10 years.

I believe this bank has the capital strength to continue with a solid dividend payout going forward, which is important for those readers of mine who are fellow dividend investors but also those who are not but are interested in the capital strength of this firm.

Consider that according to its Q3 presentation its CET1 ratio is now up to 9.7%, along with an enhance in earning assets to $607B.

It is also a cash-rich company, in my opinion, with $64.3B in cash and equivalents, up from $41.6B in the prior year quarter, which is quite a jump.

Dividend Yield Above Average

I am looking for a dividend yield above its sector average, and here is what I found:

I created the above chart to contrast 4 regional banking peers that include U.S. Bancorp, PNC Financial (PNC), Bank of Montreal (BMO), and Dallas-based Comerica (CMA).

Of these, Comerica leads in dividend yield with 5.83%, while USB is trailing behind at 3rd place in this group with 4.88% yield.

As a dividend-oriented investor, if I was picking I would obviously consider the highest yield first, but that is not to say that a near 5% yield at U.S. Bancorp is bad either. So, in this category, my sentiment on this stock is middle-of-the-road.

P/E Valuation vs Average

I am looking for an undervaluation opportunity when it comes to price-to-earnings, and here is what I found:

Looking at the valuation data on Seeking Alpha, the forward P/E ratio is now at 10.86, or roughly 8% above the sector average but declined over its own 5 year average.

Tying this price multiple back to the financials I discussed earlier, particularly earnings, I will call it slightly overvalued because the share price spiked while the earnings actually declined by a lot, and this seems to be what is driving this multiple. If both earnings and share price climbed together, then I may consider it justified, but otherwise do not.

So, another point in the “hold” category rather than a buying opportunity now.

P/B Valuation vs Average

I am looking for an undervaluation opportunity when it comes to price-to-book value, and here is what I found:

The forward P/B ratio of 1.30 was 19% above the sector average however a 14% drop over its own 5 year average.

Tying this to financial data in the balance sheet, we can see in the recent quarter that total equity/book value was $53.57B vs $47.97B in the year prior, a nearly 12% YoY improvement. So, although share price has spiked so has equity therefore I would say this price multiple is justified and I would be willing to pay 1.3x book value for an otherwise strong bank admire this. Hence, a point in the “buy” side of the scoring matrix.

Share Price vs 200-day Average

My portfolio strategy prefers dip-buying opportunities when the share price falls below the 200-day simple moving average, so here is what I found:

As of Friday’s market close on December 1st, the share price was trading about 11% above the 200-day simple moving average.

Considering the recent 16% YoY earnings reject and only 9% top-line growth, I would not call this a great buying price right now, as a better opportunity existed during the October dip as you can see from the chart.

This appears more of a hold right now.

Key Risk

As an investor and analyst I find it relevant to scrutinize risk as well, and so with a regional bank and the type of business it is the key risk to consider is asset risk exposure, particularly exposure to bad loans and certain types of commercial property loans.

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So, based on the evidence I think it supports a hold sentiment right now rather than a buy, so in this risk category I am adding a point to the hold section.

Wrap-Up

To summarize, after my re-rating of U.S. Bancorp I am downgrading to a hold, with a neutral sentiment about this company.

Positive drivers are revenue growth, dividend growth, and a justifiable price to book value.

Some offsetting factors are negative earnings growth, a below average dividend yield, and share price now well above the 200-day moving average.

In addition, the risks of rising net charge-offs and delinquent loan trends are of moderate concern.