A few months ago, I wrote a Fool on the Street about US Bancorp (NYSE: USB ) . I recently read the latest US Bancorp transcript from the UBS Financial Services Conference, and as Yogi Berra says, I felt like it was deja vu all over again.
However, that's no knock on the company. In fact, its simple business model and earnings predictability is probably what attracted the interest of Warren Buffett (or someone else at Berkshire). Since the latest Fool on the Street article, it's been revealed in Berkshire Hathaway's (NYSE: BRK-A ) (NYSE: BRK-B ) SEC filings that it owns 23 million US Bancorp shares.
Now that we know that uber-investor Berkshire is on board, let's take a look at the latest analyst conference call to see if we can get some clues for what caught Buffett's eye.
Corporate profile
First, a quick primer. US Bancorp, founded in 1863, is the nation's sixth-largest bank by deposits, and its peer group of banks includes Wachovia (NYSE: WB ) , Wells Fargo (NYSE: WFC ) , Citigroup (NYSE: C ) , and SunTrust. The company has 2,498 banking offices, $221 billion in assets, $145 billion in loans, $118 billion in deposits, and a $60 billion market cap.
Statistical excellence
Statistically, US Bancorp is a value investor's dream. If it were a basketball player, it would be 7 feet tall, have a 40-inch vertical, and a sweet jump shot. The numbers are robust across the board.
The company consistently generates returns on equity of over 20%, and its return on assets hovers above 2%. Compare that to its peer group (of the largest banks) of a 15% ROE and 1.4% ROA. It ranks at the top in terms of having the lowest efficiency ratio (or the lowest expense ratio) at 46%, a whopping 10% better than the 57% median ratio of its peers.
The company also generates 50% of its sales from fee income -- which isn't tied to interest rates and thus results in more consistent earnings. Some other well-respected banks with high fee income sales mixes are Marshall & Ilsley (NYSE: MI ) and PNC Financial (NYSE: PNC ) . US Bancorp's mix of consumer and wholesale banking, as well as wealth management and payment processing, have created a relatively simple but very high-quality stream of earnings.
What US Bancorp doesn't do
Perhaps just as important are the things US Bancorp doesn't do. CEO Richard Davis noted that despite the bank's low efficiency ratio, the company has never announced a cost-cutting initiative or brought in an outsider to help run the bank.
Instead, Davis remarked that keeping costs low is "in our DNA." I noted that this is almost exactly identical to what Torchmark (NYSE: TMK ) CEO Mark McAndrew said in a previous article regarding administrative costs. McAndrew noted that keeping their costs low was "a way of life."
It should be noted that both of these companies are some of the best-run companies in their industries, both have ultra-low costs compared to competitors, and both are in Berkshire's portfolio. Point taken.
US Bancorp also doesn't do a lot of investment banking or proprietary trading (betting on securities with the bank's own money), and it also seems to refrain from doing a large number of big bank mergers. By avoiding these flashy areas, US Bancorp not only steers clear of the bright lights, it also sidesteps the pitfalls that tend to happen afterwards.
A bank to bet on?
Knowing that Berkshire has invested in US Bancorp, it's no suprise that its shares, at 13 times trailing earnings and a 4.5% dividend yield, are tempting. Management's goals are to generate 20% return on equity, 10% EPS growth, and return 80% of income to shareholders via dividends and buybacks.
Here's how I see it. US Bancorp will take its net income and give you, the shareholder, about a 5% return on your money, it'll then reinvest the rest of income by buying back more shares or reinvesting in growth initiatives, and thus hopes to grow earnings per share 10%. I think the stock's current multiple is fair and should be stable, so I'd estimate that dividends and earnings growth added together would give shareholders a healthy 10%-15% annual total return over time, in line with the company's historical performance.
Related Foolishness:
Berkshire Hathaway is a Motley Fool Inside Value recommendation. US Bancorp is a Motley Fool Income Investor recommendation. Try any one of our investing services free for 30 days.
Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.
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