Smart Dividend Portfolio Edition #62: Regional Powerhouse
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Dear Investor,
Welcome to the 62nd edition of TipRanks’ Smart Dividend Portfolio & Newsletter.
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Market-Moving News: May 26, 2025
Stocks clocked in large weekly declines, returning to year-to-date losses. The Dow Jones Industrial Average (DJIA) fell by 2.47%, the S&P 500 (SPX) dropped by 2.61%, and the tech-heavy Nasdaq-100 (NDX) declined by 2.39% for the week. The S&P 500 logged four straight days of losses for the first time since the reciprocal tariffs hit on April 2.
The technology sector was the worst performer on Friday, reversing its previous outperformance over other sectors. This followed comments from President Trump threatening 25% tariffs on Apple if the company did not shift its iPhone production to the U.S. Later in the day, the President clarified that these tariffs would apply to other phone makers as well.
Losses accelerated further after Donald Trump said in a social media post that trade talks with the European Union were going nowhere, and that he plans to impose a “straight 50% tariff” on the bloc as soon as June 1. The EU is America’s largest trading partner, accounting for nearly 20% of total trade.
And just like that, trade war fears returned to haunt the markets. The new tariff threats added to other developments weighing on sentiment, including Moody’s downgrade of the U.S. credit rating, a weak Treasury auction and concerns over the surging fiscal deficit – which alone may have been overlooked by the markets, but trade policy volatility has pushed them to the surface. Last week served as a reminder that until trade deals are finalized with major trade partners, the tariff theme will continue to be a source of major uncertainty and stock-market risk.
However, Trump wasn’t all bad news for the stocks last week. On Friday, the President signed executive orders aimed at increasing domestic nuclear power production fourfold over the next 25 years. The orders cut down on regulations and give the U.S. Energy Secretary powers to fast-track new licenses for reactors and power plants in a bid to boost the U.S. nuclear power production. The orders will also clear a path for the Department of Energy and the Pentagon to build nuclear reactors on federally owned land.
Trump declared an energy emergency during his first day back in office, citing the fastest rise in power demand in two decades from the AI boom and data-center buildout. Traditional and renewable energy sources are already strained, while nuclear energy can alleviate the “power hunger” without – if done right – harming the environment.
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This Week’s Quality Dividend Stock Idea
U.S. Bancorp (USB) is a leading U.S.-based financial services company, primarily known for its banking, payment, and wealth management services. USB is the fifth-largest commercial bank in the United States by assets, offering a broad range of services – including consumer and business banking, commercial lending, mortgages, credit cards, and investment products – to individuals, corporations, and institutions nationwide. With a sharpened focus on digital innovation and cost discipline, U.S. Bancorp has built a strong national footprint while preserving deep ties in its Midwest core markets.
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Banking Evolution
U.S. Bancorp traces its origins to 1863 with the founding of the First National Bank of Cincinnati. Its modern structure began to emerge in 1891 with the establishment of United States National Bank in Portland, Oregon, later expanding through a series of regional mergers. A defining milestone came in 1997 with the merger of First Bank System and U.S. Bancorp, reinforcing its Midwest presence. This was followed by the $21 billion acquisition of Firstar Corporation in 2001, forming a national banking platform with more than $160 billion in assets.
Since then, USB has pursued targeted acquisitions to scale operations and diversify services. These include Mellon 1st Business Bank in 2008, PFM Asset Management in 2022, and the transformational $8 billion acquisition of MUFG Union Bank, completed in December 2022. The Union Bank deal added nearly 1 million consumer accounts, 190 branches (primarily in California), and a $58 billion loan portfolio, significantly expanding USB’s West Coast presence and deposit base. Integration efforts have strengthened digital capabilities and bolstered fee-based income, particularly in wealth management and payments.
USB’s investments in digital innovation – including its 2022 partnership with Payactiv for earned wage access – have supported customer acquisition and revenue diversification. The company’s focus on operational discipline and technology-driven offerings has helped drive sustained growth. By year-end 2024, USB generated approximately $28 billion in total revenue and over $5 billion in net income, while maintaining a market cap near $67 billion and a footprint spanning 2,000+ branches across 26 states. Its credit profile remains strong, underpinned by stable earnings, capital strength, and prudent risk management.
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Strategic Growth
U.S. Bancorp, based in Minneapolis, is a leading financial services holding company serving around 15 million clients across 26 states. The bank serves individuals, businesses, institutions, and government entities with a broad array of services, including lending, deposits, capital markets, and investment and trust services.
The company operates through diversified business segments: retail banking, commercial banking, wealth management, payment services, and treasury and corporate support. Its lending portfolio includes traditional loans, asset-backed lending, trade finance, and card products. Deposit services range from basic checking and savings accounts to time deposits, while capital markets and treasury services support corporate clients.
USB’s business model integrates a national digital-physical network, strengthened by its 2022 acquisition of MUFG Union Bank, which expanded its footprint in California, Washington, and Oregon. In California, consumer and small business penetration remains well below its Midwest average, offering meaningful runway for growth.
U.S. Bancorp’s fee income accounts for 41% of total net revenue, led by trust and investment management, capital markets, and payment services. Q1 net interest income was $4.12 billion, driven by a loan portfolio worth $379 billion and $507 billion in deposits. Non-interest income rose 5% to $2.8 billion, led by payments and trust fees.
USB aims to deepen client relationships and attract new customers by leveraging partnerships and its broad product suite. In FY25, it expects fee income to grow by 4–6%, fueled by momentum in payments, trust and investment management fees, and capital markets activity.
The Payment Services segment generates both fee income (from transaction processing, merchant services) and net interest income (NII, from card-related lending). This segment is a key revenue driver, with $42 billion in average loan balances and $925 billion in processed purchase volume over the past year, with both growing by 4% during the trailing twelve months.
In Q1 2025, Payment Services generated $1.77 billion in revenue, up 5.8% year-over-year. The bank is modernizing this business by targeting affluent clients, enhancing digital integration, and creating synergies across segments. Its Elan subsidiary adds scale by offering processing services to over 1,200 institutions, including ATM and debit card operations.
Targeting a 3% net interest margin1 by 2026–2027, USB is optimizing asset yields and deposit costs. The bank also actively manages interest rate risk and is closely monitoring sectors vulnerable to tariffs. Despite emerging risks, no significant credit issues have surfaced, highlighting USB’s resilience and proactive risk management approach. In the first quarter, USB had a net interest margin of 2.72%, up two basis points year-over-year.
USB manages interest rate risk through a balanced portfolio of floating and fixed-rate assets, supplemented by hedging strategies to offset sudden rate shifts.
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1 – Net Interest Margin (NIM) measures a bank’s profitability by showing the difference between interest income and interest expense as a percentage of average earning assets.
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Profit Discipline
U.S. Bancorp has shown resilient financial performance, supported by its diversified banking operations. Over the past three years, USB’s revenues have grown at a 3.3% CAGR, driven by business expansion and rising fee and interest income. However, earnings declined at an annual rate of 4.5% during this timeframe reflecting pressure from rising costs, elevated interest expenses, and higher credit provisions that outpaced revenue growth. In Q1 2025, USB demonstrated improved cost control, cutting non-interest expenses by 5% year-over-year to $4.2 billion. The bank has now delivered six consecutive quarters of expense discipline, enabling it to fund strategic investments in payments and digital platforms. This focus on cost efficiency helped drive adjusted diluted earnings per share to $1.03, up 32.1% year-over-year, beating analyst estimates.
Total revenue for the quarter was $6.92 billion, up 3.6% year-over-year, led by growth in payments and investment management fees. This resulted in positive operating leverage2 of 270 basis points on an adjusted basis, marking the third straight quarter where revenue growth outpaced expenses.
Loans averaged $379 billion, up 0.9% sequentially, while deposits averaged $507 billion, down 1.1% due to seasonal trends. Net interest margin rose to 2.72%, supported by asset repricing and efficient balance sheet management. Credit quality remained solid, with a net charge-off ratio3 of 0.59%, up modestly from the prior year, driven by commercial and card losses. Nonperforming assets improved to 0.45% of loans, down from 0.48% in Q4 2024.
Capital levels have also strengthened. The CET14 capital ratio increased to 10.8%, supported by modest share repurchases and strong capital generation. CET1 ratio (including Accumulated Other Comprehensive Income) improved to 8.8%, providing a clearer picture of balance sheet resilience amid interest rate volatility.
Looking ahead, USB expects Q2 2025 net interest income of $4.15 billion at midpoint and non-interest (fee-based) income of $2.9 billion. Full-year 2025 revenue is projected to grow by 3%–5%, with operating leverage forecast to expand by at least 200 basis points, reflecting faster revenue growth than the increase in expenses, supporting profitability.
The bank retains strategic flexibility to reduce spending if needed, through levers like real estate reduction, automation, and organizational streamlining. This strategy has enabled USB to consistently deliver strong operating leverage, improve efficiency, and maintain flat cost levels despite ongoing investments. While USB’s debt-to-equity ratio of 1.28 exceeds the industry median, its strong credit ratings of “A3” from Moody’s and “A+” from Fitch reflect sound financial health and disciplined risk management.
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2 – Operating leverage, a key banking metric, measures a firm’s ability to grow income faster than costs, reflecting efficiency improvements as scale increases.
3 – Loan net charge-offs measure credit losses—representing uncollectible loans written off, minus recoveries on previously charged-off loans during a period.
4 – CET1 ratio is a measure of the bank’s financial strength and solvency.
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Shareholder Value
U.S. Bancorp continues to prioritize shareholder value through consistent dividends and strategic share repurchases, backed by strong financial performance. The bank has raised its dividend for 14 consecutive years, reinforcing its reputation as a reliable dividend payer. In Q1 2025, USB paid a quarterly dividend of $0.50 per share, equating to an annual dividend of $2.00 and a yield of 4.6%, notably above the regional banking sector average of approximately 1.38%. With a payout ratio of around 49%, USB balances shareholder returns with earnings retention, enabling investments in organic growth and operational efficiency.
Supported by a return on tangible common equity of 17.5%, among the top 30% in the industry, and $5 billion in 2024 net income, USB has ample free cash flow to fund both dividends and buybacks. In Q1, it repurchased $100 million worth of shares, contributing to an EPS increase to $1.03. USB also has a $5 billion multi-year buyback program in place, signaling long-term confidence in capital strength. Management is currently keeping repurchases modest to prioritize capital building and loan growth, with plans to increase buybacks as the CET1 ratio trends toward 11% by 2027.
USB stock has risen by around 6% over the past year, supported by stronger earnings, the MUFG Union Bank integration, and a resilient payments segment. The stock trades at a trailing P/E of 10.5x, below the sector median and at a discount to its five-year average. On a price-to-book basis, it trades at a ~15% discount to its historical average, lagging peers like WFC and PNC.
Analysts remain optimistic, with a consensus price target suggesting an upside just shy of 20%, and some projecting gains of up to 47% – driven by USB’s diversified revenue base and strong capital position, which support continued earnings and free cash flow growth to fund shareholder returns. Discounted cash flow models suggest USB is undervalued by around 44%, signaling further upside.
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Investing Takeaway
U.S. Bancorp stands out as a stable, well-managed regional bank with a strong track record of shareholder returns. Through strategic acquisitions and disciplined cost control, the company has built a diverse and resilient business model, anchored by consistent fee income and robust credit quality. Its focus on operational efficiency and digital innovation supports earnings growth, while its long history of dividend increases, and measured share repurchases demonstrates a commitment to rewarding investors. Despite broader sector volatility, USB’s strong capital position, expanding market presence, and undervalued stock price present a compelling long-term opportunity for investors seeking both income and growth potential.
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Dividend Investor Portfolio
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Portfolio News
▣ In a move that could benefit banks like JPMorgan Chase (JPM), Treasury Secretary Scott Bessent confirmed to Bloomberg that U.S. regulators may ease the supplementary leverage ratio (SLR) rule as early as this summer. The SLR requires banks to hold capital against Treasury holdings, limiting their trading capacity. Bessent said the Fed, OCC, and FDIC are actively working on the issue, and relaxing the rule could lower Treasury yields by tens of basis points.
In another development, according to a WSJ report, major U.S. banks, including JPM, are exploring the idea of launching a joint stablecoin to compete with crypto firms, though discussions are still in early stages. A final decision will depend on regulatory developments and market demand. Banks are concerned that stablecoins, especially if backed by tech or retail giants, could draw deposits and transactions away from banks. Stablecoins, which act as digital dollars backed by cash or Treasurys, offer potential for faster payments, including cross-border transactions. One proposed model would allow multiple banks to use the coin, but regulatory and security concerns remain significant hurdles.
▣ LyondellBasell (LYB) has increased its quarterly dividend by $0.03 per share to $1.37 per share. The dividend will be payable on June 9, with an ex-dividend and record date of June 2, 2025.
▣ The FTC has dismissed without prejudice its lawsuit against PepsiCo (PEP), originally filed under the Robinson-Patman Act in the Southern District of New York. The case, authorized on January 17, alleged that Pepsi engaged in price discrimination by offering discounts or services to favored customers. FTC Chairman Andrew Ferguson criticized the prior administration’s decision to pursue the case, calling it a politically driven move made just days before President Trump’s inauguration.
In another development, PepsiCo has closed its $1.95 billion acquisition of Poppi, a prebiotic soda brand, including $300 million of anticipated cash tax benefits for a net purchase price of $1.65 billion.
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Recent Trades
None at the moment, although we are considering adding a stock to our portfolio when the market conditions allow for an attractive entry point. Stay tuned.
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Portfolio Attributes
Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
3.95% | +6.66% | $5,946.34 |
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) | Jun 12, 2025 | Jul 01, 2025 | 2.46% | $6.16 |
Amgen (AMGN) | Aug 18, 2025 | Sep 09, 2025 | 3.27% | $9.52 |
BlackRock (BLK) | Jun 09, 2025 | Jun 26, 2025 | 2.61% | $20.84 |
Bank of Nova Scotia (BNS) | Jul 03, 2025 | Jul 29, 2025 | 5.98% | $2.97 |
EOG Resources (EOG) | Jul 17, 2025 | Jul 31, 2025 | 3.05% | $3.90 |
ExxonMobil (XOM) | Aug 15, 2025 | Sep 10, 2025 | 3.64% | $3.96 |
IBM (IBM) | Aug 11, 2025 | Sep 10, 2025 | 3.14% | $6.72 |
JPMorgan Chase (JPM) | Jul 08, 2025 | Jul 31, 2025 | 3.2% | $5.60 |
Kroger (KR) | Aug 15, 2025 | Sep 01, 2025 | 2.82% | $1.28 |
LyondellBasell (LYB) | Jun 03, 2025 | Jun 10, 2025 | 5.74% | $5.48 |
PepsiCo (PEP) | Jun 09, 2025 | Jun 26, 2025 | 3.64% | $5.44 |
Philip Morris (PM) | Jun 23, 2025 | Jul 17, 2025 | 6.06% | $5.40 |
Qualcomm (QCOM) | Sep 05, 2025 | Sep 26, 2025 | 2.36% | $3.56 |
VICI Properties (VICI) | Jun 18, 2025 | Jul 03, 2025 | 5.22% | $1.73 |
Verizon (VZ) | Jul 10, 2025 | Aug 05, 2025 | 6.09% | $2.71 |
NameEX-Dividend DatePayment DateYield on Cost Annual DPS
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
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