Stock of the Week
NYSE Symbol: USB
Price as of 12/10: $26.45
The major averages had a nice bounce this week touching new highs for the year as President Obama gave in to the Republicans by supporting the extension of the Bush tax cuts along with some other stimulus ideas. The largest US bond fund company, PIMCO who has been rather bearish on the economy, just this week raised their US economic forecasts for 2011 based on the tax extension. US corporations continue to generate strong profits. Based on this, Goldman Sachs raised S&P 500 earnings forecast to $94 a share next year and $104 a share for 2012. Their S&P 500 price target is 1450 for next year or 17% from present levels. JP Morgan and Barclays have similar price targets. That would be a nice return. Even though the markets and the economic data are getting better, not all sectors have performed well. One sector in particular that has been out of favor since April is the financials. However, this week, we witnessed some money rotating into the banks and insurance stocks. Goldman Sachs helped spur the rally a week ago Friday calling the financials their top sector for 2011. This week Blackrock made bullish comments on their profit margins and the improving fundamentals for the industry. The financials should also have a nice catalyst coming in 2011 when the big banks like JP Morgan, Wells Fargo and others will be allowed to significantly raise their dividends and initiate share buyback plans. Wells Fargo has performed well of late up 27% since we featured it in October. This week we'll feature another blue chip financial that should perform quite well next year. The stock of the week is US Bancorp. US Bancorp has been mentioned in the same breath as JP Morgan, Wells Fargo, and PNC Financial when it comes to a strong capital base and a desire to hike their dividend. Investors with a long term outlook should consider the financials ahead of the dividend hikes coming next year.
Back in October, US Bancorp the fifth largest US bank, beat estimates by 2 cents earning 45 cents a share or $908 million. Revenue rise 1.5% to $4.59 billion. US Bancorp saw new lending activity of $54.8 billion during the third quarter and significant growth in average deposits. Net interest margins were better than expected coming in at 3.91%. Net charge-offs declined 10.7% and Nonperforming assets decreased 4.6 % from the second quarter of 2010. That's a good sign. Tier 1 common equity ratio came in at 7.6% and Tier 1 capital ratio was 10.3 %. Looking forward, US Bancorp expects loan growth in the fourth quarter to be twice what it was in the third quarter and earnings should come in around 47 cents a share. The bank is aiming for long-term earnings-per- share growth of 8 percent to 10 percent.
Recently at a Goldman Sachs Financial Services Conference, Chief Executive Richard Davis made comments indicating US Bancorp hopes to get regulatory approval in March to pay out about 30 percent of its profit as dividends, which could translate into a dividend nearly tripling or going from 5 cents to 14 cents per share. Longer term, US Bancorp hopes to pay out about 35 percent to 40 percent of its profit as dividends, and to use another 35 to 40 percent for share buybacks. These levels would be in line with the bank's averages before the crisis.
US Bancorp's valuation is modestly higher than rival banks. Currently the stock trades for 12 times earnings, 3.8 times sales, and 1.8 times book value of $14.20 a share. Recently US Bancorp was upgraded to Outperform at Oppenheimer and a price target of $29 a share. The analyst made comments indicating that it is fitting that US Bancorp, who has among the best credit quality in the group, should be the first to return to growth mode. At current levels US Bancorp dividend would jump to over 2% once they raise their dividend next year.