Warren Buffett’s Berkshire Hathaway ( BRK.A -0.78% )( BRK.B -0.51% ) may have been redeemed over the course of the past few weeks, its stock rising when other stocks were falling, and it re-took its long-term performance lead over the S&P 500. Not every Berkshire holding participated in the rally, though. U.S. Bancorp ( USB -2.05% ) share prices are still down 10% from January’s highs despite a solid rebound from last month’s lows.
Don’t read too much into this near-term weakness, though. It may be unimpressive right now, but U.S. Bancorp — you know it better as U.S. Bank — is still a holding worth hanging on to.
Image source: Getty Images.
U.S. Bancorp leverages its smaller size
As far as bank stocks go, it’s typically not a top-of-mind name to round out a portfolio with a new pick from the financial sector. U.S. Bancorp is the U.S.’s fifth-largest bank (as measured by assets), but that’s a distant fifth. Its $567 billion in assets is roughly one-sixth that reported by the biggest name in the business, JPMorgan Chase.
Don’t let its small size fool you, though. What U.S. Bank lacks in exposure, it more than makes up for in nimbleness and savvy.
Take its new branch format, for instance. More than a mere place to make deposits or open checking accounts, U.S. Bank’s physical footprint going forward will focus on facilitating deeper conversations with customers about things like mortgages or demonstrating the company’s digital apps. The bank is also customizing branches to address the unique cultural needs of the neighborhoods where they’re located.
Tailor-making such customer experiences can be tough to do for a bigger banking name like Bank of America, which operates 4,200 branches in addition to several non-banking businesses. For perspective, there are only around 2,200 U.S. Bank locales.
U.S. Bancorp’s smaller size also means it’s more able to adapt its back-office operations. This includes updating computer systems handling all of its digital data and subsequent interfaces with customers as well as employees.
It’s not surprising to learn that the COVID-19 pandemic sparked a surge in the use of banking apps. As the pandemic fades, however, usage of such apps remains brisk. Recognizing this as an opportunity as well as a need, U.S. Bancorp announced in February that it will be modernizing its computer network with cloud computing management platform Azure, from Microsoft. Among other things, the bank is looking forward to being able to use artificial intelligence and personalizing its customers’ engagement with the company.
Such migrations are always difficult, but they increase in difficulty the bigger the company is.
U.S. Bancorp’s smaller size doesn’t merely allow it to rethink branches and update its technologies. The smaller, more intra-familiar organization can effectively do many of the touchy-feely things bigger banks simply can’t. For instance, in January the company hired former WW International (Weight Watchers) executive Julie O’Brien, Ph.D., as U.S. Bank’s head of behavioral science and coaching. What’s that? In simplest terms, the social psychologist is tasked with finding ways for the bank to help its customers achieve their goals, including their non-financial ones.
The actual bullish case
None of this means much to investors, of course, if it doesn’t ultimately drive more revenue and earnings. Don’t worry. U.S. Bancorp is seeing a fiscal benefit from all of its creative, customer-focused efforts.
The graphic below tells the tale. While the company suffered the expected headwind linked to the initial spread of the COVID-19 pandemic, it didn’t last long. Indeed, it may have ultimately boosted U.S. Bank’s profit-driving capabilities. This year’s projected revenue of $25.2 billion would break another record, and though income is expected to slip from last year’s levels, last year was an anomaly.
This year’s estimated per-share profit of $4.38 would mark the company’s second most profitable year ever, en route to regularly record-breaking bottom lines again by 2023.
Data source: Thomson Reuters. Chart by author.
Clearly, the analyst community believes that many of the initiatives the bank is working on now will support even more growth in the foreseeable future than seen in the recent past.
The kicker: While shares of U.S. Bancorp may be tepid performers of late, the company’s ability to fund its dividend isn’t in any jeopardy. Last year’s total payout of $1.76 per share is still only a fraction of 2020’s per-share profits of $3.06, and that year’s bottom line was about three-fourths the norm through 2019. Newcomers will be plugging into this stock while the dividend yield is a healthy 3.2%.
Forever pretty much means forever
The usual caveats still apply, of course. While U.S. Bancorp is a good “forever” name as it stands right now, things can change. Just ask investors holding General Electric in the late 1990s, or camera and film company Kodak‘s investors in the early 2000s. A buy-and-hold approach doesn’t mean you can afford to stop checking in from time to time and assessing your companies’ probable future.
In the case of U.S. Bancorp, though, there’s a reason Warren Buffett’s Berkshire Hathaway has held onto it for all these years despite its relatively lackluster performance for the past few of them. That is, given enough time, odds are good this stock will remind the market that it’s still in a long-term uptrend. That’s particularly the case now that interest rates are set to rise, making lending a more profitable venture.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.