Dividend Investor Portfolio #33: Stability and Reliability
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Dear Investor,
Welcome to the 33rd edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: November 4, 2024
Major U.S. indexes closed the action-packed week with losses, as Friday’s rebound wasn’t enough to offset Thursday’s sea of red. The S&P 500 (SPX) dropped by 1.37% on the week, while the Dow Jones Industrial Average (DJIA) declined by 0.15%. Meanwhile, the tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) fell by 1.50% and 1.57%, respectively.
On Thursday, the S&P 500 fell more than 1.5% as the market reacted to Meta Platforms’ and Microsoft’s earnings. Even though the tech giants reported much better-than-expected results, the market’s reaction was influenced by concerns over increased spending and a more conservative outlook on AI growth from both companies.
Halloween’s tech-driven plunge on Thursday was also exacerbated by the latest Core PCE report, which cast a shadow on the Fed’s rate-cut outlook. The Federal Reserve’s preferred inflation measure posted its biggest monthly gain since April. However, Friday’s weak job market report helped maintain the expectations of another interest-rate decrease at the central bank’s policy meeting this week. Traders now unanimously expect a 0.25% rate cut.
The U.S. economy added just 12,000 jobs in October, well below the already-low estimates of 115,000, posting the worst job-gain result since its December 2020 decline. However, the outcome was strongly impacted by back-to-back hurricanes and a strike at Boeing, making the job report more noisy than useful. Still, given that the actual job growth from the past two months ended up being lowered by 112,000 from previous estimates, the latest numbers fit the trend of deceleration in the labor market.
The report showing that U.S. manufacturing contracted more than expected underscored the sizable blow that high interest rates delivered to the economy, particularly to the more capital-intensive sectors. The preliminary Q3 GDP growth also came in lower than was anticipated by economists. While the annual economic growth rate of 2.8% is still exceptionally strong, it was less than the 3% the market was expecting, and also represented a slowdown from Q2’s 3% expansion. A solid, but weakening economy suggests further gradual pace of policy rate cuts.
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This Week’s Quality Dividend Stock Idea
U.S. Bancorp (USB) is a financial services holding company, which provides various financial services to individuals, businesses, institutional organizations, governmental entities, and other financial institutions in the United States. The bank provides a range of financial services, including lending and depository services, cash management, capital markets, trust and investment management services, and many more.
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History of Prudent Growth
U.S. Bancorp has a rich history dating back to its origins in 1863. The institution that would eventually become U.S. Bancorp was founded as the First National Bank of Cincinnati, which in the same year received national bank charter No. 24, providing it with a license to operate across the country. It became one of the first banks that began operating under the National Banking Act of 1863, a legislation signed by President Abraham Lincoln to establish a system of national banks and create a uniform national currency, primarily to fund the Civil War and stabilize the national economy.
One year later, another banking institution was founded – The First National Bank of Minneapolis – which also played a significant role in the history of U.S. Bancorp. It contributed to the foundation of the company’s significant presence in Minneapolis, where the headquarters of U.S. Bancorp are still located today. The “U.S. Bank” name first appeared as The United States National Bank of Portland, established in Oregon in 1891, which was another significant precursor to today’s U.S. Bancorp.
The three main predecessors grew in their respective regions of operations, over time undergoing various mergers that expanded their reach and operational scale. Years later, in 1997, a significant merger occurred between First Bank System (which had acquired the First National Bank of Minneapolis) and U.S. Bancorp of Oregon (formerly known as United States National Bank of Portland).
This merger was strategic in combining the extensive branch networks and financial services of both banks under a unified brand – U.S. Bancorp – creating one of the largest banking institutions in the United States. After the 1997 merger, U.S. Bancorp continued to acquire other financial institutions, including the corporate trust assets of Firstar Corp., which had previously merged with the Star Bank, the successor to the First National Bank of Cincinnati.
The bank first came into the spotlight at the time of the Global Financial Crisis and the subsequent recession in 2008-9. Thanks to its prudent approach to risk management, USB was the only regional bank to remain profitable every quarter during the financial crisis and recession. Moreover, the bank leveraged its position of strength to expand and gain market share at a time when most of its peers were struggling.
Today, U.S. Bancorp has a market capitalization of nearly $75 billion and annual revenues of over $28 billion, earning it the #107 rank on the Fortune 500 list. With total assets amounting to approximately $687 billion and assets under management (AUM) of $472 billion, U.S. Bancorp is the largest regional bank and the fifth-largest banking institution in the United States.
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Prudent, Efficient, and Tech Proficient
U.S. Bancorp has distinguished itself in the financial services industry through a well-rounded business model that contributes significantly to its success. In fact, USB’s business is probably the most diversified among its regional peers in terms of services provided, encompassing a wide range of offerings such as retail, commercial, and institutional banking, as well as wealth management, payment services, and more. This diversification helps to mitigate risk by not being overly reliant on any single business segment. The bank’s strong presence in the Midwest and Western U.S., where it serves a broad geographic area and a diverse customer base, also helps in spreading economic risk and tapping into various market opportunities.
Another strong point for the bank is its prudent risk management, demonstrated by its low levels of non-performing loans. This focus on maintaining high credit quality underpins its financial stability and investor confidence. In addition, U.S. Bancorp is known for operational efficiency, USB frequently reports a lower cost-to-income ratio compared to its peers, which supports profitability even in less favorable economic conditions.
Moreover, U.S. Bancorp has been recognized for its approach to digital innovation. The bank has heavily invested in digital transformation, enhancing its online and mobile banking platforms. USB proactively explores advancements that could impact banking, e-commerce, and money management, seeking to identify and integrate advanced technological tools and solutions. This focus on technology not only improves customer experience but also positions the bank competitively against both traditional and fintech players in the rapidly evolving digital landscape.
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Diversified Revenue Sources Key to Stability
U.S. Bancorp operates through Wealth, Corporate, Commercial and Institutional Banking (WCIB); Consumer and Business Banking (CBB); and Payment Services segments. The WCIB division is the largest segment within USB, providing 43% of total revenues. Another 33% of revenues is derived from the CBB segment, with the Payment services providing the additional 24%.
The distribution of revenue sources across different business segments of U.S. Bancorp underscores the importance of diversification. Thus, in the WCIB segment, 37% of the revenue comes from fees, while the rest is derived from Net Interest Income (NII), which is the income earned from the difference between interest earned on assets and interest paid on liabilities.
In the CBB division, the lion’s share of the revenue (82%) is derived from NII, reflecting a higher reliance on traditional banking operations like loans and deposits for generating revenue. Naturally, this segment would be the most vulnerable to macroeconomic headwinds due to the sensitivity of the NII to changes in interest rates. In addition, in an economic downturn the segment with higher exposure to traditional banking may suffer from higher credit losses and/or lower deposits.
Therefore, USB’s Payment Services segment stands out as a buffer against these and other potential headwinds, as it derives 60% of its revenue from fees related to its card issuance and processing, merchant services, credit lines, and payment processing services.
Over the past three years, the Payments segment has been the fastest growing division, experiencing a consistent increase in revenue. This performance highlights the strategic focus of U.S. Bancorp on expanding its payment services and leveraging technology to enhance transaction processing and financial services solutions.
In total, fee income constitutes 40% of U.S. Bancorp’s total net revenue, considerably higher than the average for U.S. regional banks. While fee income isn’t without its risks, such as exposure to market volatility or transaction volumes, it is not as directly impacted by interest rate changes or credit risks associated with lending activities. The higher percentage of fees in total revenue mix helps insulate them from a flattening yield curve and the associated profit squeeze. Moreover, fee income is generally more stable and predictable compared to interest income, enhancing profitability metrics through reduced earnings volatility.
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Health, Wealth, and Reliability
U.S. Bancorp’s financial health is more than stellar, as indicated by its high credit ratings. The bank is rated “A+” at Fitch and Standard & Poor’s and “A1” at Moody’s, reflecting its robust financial health, sound risk management practices, strong capacity to meet financial commitments, and overall low credit risk.
U.S. Bancorp’s balance sheet and financial health metrics show a robust standing compared to its regional peers, demonstrating a strong capital structure and a healthy liquidity position. Thus, it has a low to moderate assets-to-equity ratio, reflecting modest debt financing. USB has low-risk liabilities, since its main sources of funding are customer deposits. The bank’s low loans-to-assets ratio reflects a high level of financial asset liquidity, while its moderate loans-to-deposits ratio indicates high funding liquidity.
USB’s allowance for bad loans showcases its prudent management, as it is more than four times the minimum required by regulations. At 418% versus the regulatory minimum of 100%, the loan-loss provision suggests that the bank is well-prepared for potential increases in loan defaults or downturns in the economy.
As of the end of Q3 2024, the percentage of U.S. Bancorp’s non-performing loans relative to its total loans stood at 0.49%, substantially lower than the average for U.S. regional banks, which reflects USB’s strong risk management practices. However, the financial sector, including U.S. Bancorp, is anticipating an increase in loan defaults due to economic conditions that might deteriorate.
In addition, the bank compares well to its regional peers in terms of total asset and deposit value, net interest margin, cash and short-term investments on its balance sheet, ROA, ROE, and ROIC. Notably, its CET1 capital ratio stood at 10.5%, reflecting strong capital adequacy. USB’s robust capital structure should make it fairly resilient amidst potential economic fluctuations.
In the past three years, U.S. Bancorp has registered strong growth in deposits, indicating robust customer trust and a solid base for funding. Its loan growth has been moderate due to less aggressive lending strategies than these at many of its peers. While this prudency may weigh on income growth, it shields the bank from many risks associated with aggressive lending. For instance, its Commercial Real Estate (CRE) loans comprise only 14% of its loan portfolio, indicating reduced risk of losses stemming from the troubled sector.
Over the same period, USB has seen steady growth in revenue, with the compound annual growth rate (CAGR) aligning closely with that of most major regional banks. EPS growth has fluctuated, influenced by a mix of higher revenue on the one hand and increased costs and provisions for loan losses on the other. Although earnings growth has not consistently outperformed the regional bank sector, it has been stable, an outlier in the industry which was hit by crisis in early 2023.
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High and Rising Dividends
U.S. Bancorp’s stability, financial robustness, and the ability to generate ample cash flows support its dividend policy, reflecting its commitment to providing consistent shareholder returns. The bank has been paying dividends since 2010, consistently increasing payouts over the past 13 years. The dividend payout ratio stands at approximately 61%, which is considered sustainable and indicates that the bank retains a significant portion of its earnings for reinvestment.
USB’s dividends have grown at a CAGR of 7.5% in the past decade, slowing to about 5% in the past five years as the dividend yield reached a high level. The bank’s current yield stands at 4.2%, almost twice the average for the Financial sector. Analysts expect the payouts to continue growing annually for years to come, albeit at a slower pace of about 3% annually. This rate of payout growth showcases the bank’s conservative approach, striking a balance between rewarding shareholders and maintaining sufficient funds for operational needs and future growth.
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Total Return in Focus
In addition to dividends, USB compensates its shareholders through buybacks. In calendar year 2023, U.S. Bancorp repurchased a total of $3.1 billion in common stock and added another $3 billion in the first three quarters of 2024. In September 2024, the bank announced a new share repurchase plan of up to $5 billion, with the company planning to start repurchasing shares by early 2025 under this authorization. This repurchase program is a significant part of USB’s strategy to return value to its shareholders and manage its capital efficiently.
USB’s shares have risen by ~35% in the past 12 months, outperforming the S&P 500, but underperformed most of its comparable peers due to its conservative approach, including high loan-loss provisions weighing on earnings. However, relatively modest stock gains have kept USB’s valuations at bay, with its current and forward PE ratios in line with the average for Financial sector stocks. USB’s current PE comes at the middle of the price scale for comparable peers in the industry. Moreover, based on its future cash flows, the bank’s shares appear to be undervalued by about 45%. The moderate valuations create attractive conditions for entry, specifically for long-term income investors.
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Investing Takeaway
U.S. Bancorp is a prominent regional banking institution noted for its extensive operations and robust financial foundation. U.S. Bancorp’s financial health is strong, making it well-equipped to manage the dynamics of the banking industry while positioning it as a leader among regional banks in terms of size, stability, and financial metrics. With a strategic focus on diversified revenue streams, including substantial fee-based services, USB is well-positioned for sustainable, stable growth. The bank’s commitment to returning value to shareholders through consistent dividends and share buybacks makes it attractive to long-term income investors.
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Dividend Investor Portfolio
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Portfolio News
¤ Qualcomm (QCOM) will release its latest quarterly results on November 6th, while EOG Resources (EOG) is scheduled to report its Q3 2024 earnings on November 7th.
¤ Edison International (EIX) reported a significant increase in third-quarter 2024 earnings, with revenue and EPS significantly topping analyst estimates.
¤ Automatic Data Processing (ADP) reported better-than-expected revenue and EPS in its fiscal Q1 2025, with the robust financial performance coming alongside strategic advancements such as the acquisition of WorkForce Software.
¤ Amgen (AMGN) reported a sizable beat on EPS in the third quarter, while revenues came in slightly better than expected. Key financial highlights include a 23% increase in total revenues and a 13% increase in EPS. The company also reported $3.3 billion in free cash flow, showcasing strong business performance.
¤ VICI Properties (VICI) reported better-than-expected revenues and earnings in Q3, also featuring a strong increase in Adjusted Funds from Operations (AFFO). The company raised its AFFO guidance for the full-year 2024.
¤ LyondellBasell (LYB) slightly missed on both revenue and earnings expectations for Q3 but reported an overall strong quarter with an increase in cash from operating activities and higher EBITDA.
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Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.92% | +9.47% | $4,606.96 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Dec 06, 2024 | Jan 01, 2025 | 2.24% | $5.60 |
| Allianz SE ADR (ALIZY) | May 09, 2025 | May 28, 2025 | 5.67% | $1.49 |
| Amgen (AMGN) | Nov 15, 2024 | Dec 06, 2024 | 3.09% | $9.00 |
| BlackRock (BLK) | Dec 08, 2024 | Dec 23, 2024 | 2.56% | $20.40 |
| Edison International (EIX) | Dec 27, 2024 | Jan 31, 2025 | 4.82% | $3.12 |
| EOG Resources (EOG) | Dec 13, 2024 | Dec 30, 2024 | 3.95% | $3.64 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.86% | $5.00 |
| Kroger (KR) | Nov 15, 2024 | Dec 01, 2024 | 2.82% | $1.28 |
| LyondellBasell (LYB) | Nov 24, 2024 | Dec 04, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Dec 20, 2024 | Jan 10, 2025 | 6.06% | $5.40 |
| Qualcomm (QCOM) | Nov 29, 2024 | Dec 13, 2024 | 2.25% | $3.40 |
| VICI Properties (VICI) | Dec 20, 2024 | Jan 04, 2025 | 5.19% | $1.72 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
