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The following segment was excerpted from this fund letter.
U.S. Bancorp (NYSE:USB)
Headquartered in Minneapolis, Minnesota, and with origins dating back to 1863, U.S. Bancorp is a diversified regional bank that operates over 2,400 branches across 26 states, primarily in the Western and Midwestern U.S. As of September 30, 2023, the company had $668 billion in assets, over $518 billion in deposits and more than $375 billion in loans, making it the fifth-largest retail bank in the country.
The bank offers a variety of services, including retail as well as commercial banking, credit cards, investment management and trust services. At the end of 2022, USB acquired Union Bank from Mitsubishi UFJ Financial (MUFG, also a Value Equity holding) for approximately $8 billion, adding $82 billion in assets to its balance sheet. This was the bank’s biggest acquisition since 2001 and provides the company with a larger presence on the West Coast, particularly in California.
High-Quality Business
Some of the quality characteristics we have identified for USB include:
- Proven operating efficiency having generated returns above peers and its own cost of capital for the last 15 years;
- Balanced loan portfolio and mix of fee-generating businesses (~40% of revenues), such as payments and corporate trusts, which often have high barriers to entry and scalability due to fixed cost structures;
- Economies of scale and attractive funding profile with high deposit share (e.g., average deposit share of 8% per state, with top five positions in 17 states); and
- History of increasing its dividend and shrinking shares outstanding (with an average annual decrease of 2% over the past decade).
Attractive Valutaion
Using our estimates of normalized earnings, we believe USB’s current stock price is offered at a discount to our estimate of the company’s intrinsic value. We believe USB is well positioned to improve its market position while maintaining an attractive return profile.
Compelling Catalysts
Catalysts we have identified for USB, which we believe will cause its stock price to appreciate over our three- to five-year investment horizon, include:
- Enhanced revenues and cost-savings through expense synergies following the recent acquisition of Union Bank;
- Continued balanced and relatively low-risk loan growth coupled with deposit share gains in most geographies in which it operates;
- Improvement in return-on-assets through both efficiency gains and a more robust product offering; and
- Increased returns to shareholders following a near-term period when, as a result of enhanced regulatory requirements due to higher total assets from the Union Bank acquisition, share buybacks were paused.
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Disclosures The opinions expressed herein are those of Aristotle Capital Management, LLC (Aristotle Capital) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to purchase or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Capital makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle Value Equity strategy. Not every client’s account will have these characteristics. Aristotle Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Capital’s Value Equity Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request. Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. All investments carry a certain degree of risk, including the possible loss of principal. Investments are also subject to political, market, currency and regulatory risks or economic developments. International investments involve special risks that may in particular cause a loss in principal, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Securities of small‐ and medium‐sized companies tend to have a shorter history of operations, be more volatile and less liquid. Value stocks can perform differently from the market as a whole and other types of stocks. The material is provided for informational and/or educational purposes only and is not intended to be and should not be construed as investment, legal or tax advice and/or a legal opinion. Investors should consult their financial and tax adviser before making investments. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Information and data presented has been developed internally and/or obtained from sources believed to be reliable. Aristotle Capital does not guarantee the accuracy, adequacy or completeness of such information. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
