Investment

Why This Banking Stock Is a Terrific Return on Investment

US Bancorp (USB 0.04%) makes money the old fashioned way, and has demonstrated success in doing so. In this clip from “The Rank” on Motley Fool Live, recorded on April 25, Motley Fool contributors Matt Frankel, Jason Hall, and Zane Fracek discuss why US Bancorp continues to be a great dividend stock.

Matt Frankel: One of the larger banks outside of the Big Four in the country. About a $75 billion market cap. A great dividend stock, almost a 4% dividend yield. It’s probably the biggest pure-play savings and loan bank in the country. They don’t have any significant investment banking operations. They make their money the old fashioned way for banks. They loan out money, collect interest, take in deposits, pay out a smaller interest rate, and profit from the difference. They have a great track record of high asset quality. They’re one of the very few large banks that remained profitable throughout the financial crisis, which very, very few banks can say. Their earnings were positive even in ’08 and ’09. They have great profitability, over 15% return on equity, which for a bank is very, very high. And they trade for less than 11x earnings right now, which is a pretty low multiple. They trade at a premium to book value, which makes sense because they have such a track record of high-quality lending. Berkshire Hathaway (BRK.A 0.81%) (BRK.B 0.69%) owns about 8.5% of the bank. It’s their No. 8 stock holding. Any comments on US Bancorp, or do you just want me to launch into the next one? 

Jason Hall: Yeah, about 1.7x book value, but then you look at the return metrics. It is consistently one of the best in terms of return on equity, return on assets of all the big banks. So, well-run. 

Frankel: Yeah, you get what you pay for. 

Hall: Yep. 

Zane Fracek: I’m curious how they’re able to grow revenue so well when they’re doing it the old fashioned way like you said, just bank account deposits and loans. 

Hall: Well, they’re doing it this way too. 

Frankel: They’re doing it that way too, and you’ve got to figure: inflation is a net benefit for a bank like that. Take, auto lending. If the average new car cost $30,000 two years ago and then cost $40,000 today, that’s 33% growth in their average loan without them doing anything. So inflation gets passed on to the banks really well in that regard. Same with mortgage lending and things like that. Inflation is a net benefit to banks with the caveat that, if it gets out of control, it can lead to a slowdown in spending. But as long as inflation is manageable, it generally gets passed on to the banks. And you’ll see that terrific loan growth, like you mentioned, without the bank really doing much organically at all. And if they can grow organically, like Jason said, by embracing technology or things like that, it’s just a bonus.




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