U.S. Bancorp's Biz
...reviewing an efficient leader
by Jeff Fischer (JeffF@fool.com)


Chicago, IL (August 26, 1998) --Drip Port finalist U.S. Bancorp (NYSE: USB) is an efficient creature following a merger in 1997 that made the company what it is today (which is, twice as large as it was beforehand). The company's return on equity is 22%, making it the best of the four finalists we've considered, though putting it less than 1% higher than finalists Mellon Bank (NYSE: MEL) and First Tennessee (Nasdaq: FTEN). It beats Fifth Third Bancorp (Nasdaq: FITB) by about 4%. Impressively, U.S. Bancorp's return on equity was only 14.9% five years ago.

Dale covered U.S. Bancorp extremely well on July 24, and last week we reviewed its history up to its recent 1997 formation. Looking at its new business a bit more closely is merited, however, as we move towards a purchase decision.

In 1997, the new U.S. Bancorp earned $4.7 billion of its revenue on loan interest. That accounted for 69% of total revenues. Other interest accounted for 7% of revenue, while credit cards accounted for 6%, as did deposit account fees (weighing in at 6% as well). Trust fees, something the company has maintained while some other banks have shied away, accounted for 5% of revenue, at $348 million. Adding various others that total 7% of revenue, total revenues were $6.9 billion last year. The company had $71.2 billion in assets, with $53.6 billion of it (or 75%) net loans and leases.

The company's operating earnings are well diversified. Last year, 51% of operating earnings came from commercial and business banking and private financial services. This includes the several areas that you'd imagine, from checking and savings accounts for businesses, to large corporate loans for business expansion. Some 28% of operating earnings were derived from retail banking, which grows as the company adds new locations, promotions, and services. About 13% of operating earnings came from high-margin payment transactions services, namely credit card processing. Finally, 8% of operating earnings were from corporate trust and institutional financial services.

The company will continue to focus on these key areas, while aiming to improve profitability and revenues of each.

U.S. Bancorp has made 24 acquisitions since 1990 and continues to search for others. Management's goal is continued prudent and highly profitable asset allocation, while it aims to grow earnings per share 12% to 15% annually over the next several years. The company has increased its dividend every year for the past seven, with last year's increase being to the tune of a 12.9% jump to 52 1/2 cents per share. (This is important, as discussed in yesterday's column on dividend payout growth.) The stock currently yields 1.70%.

Coupled with Dale's complete numbers and comprehensive overview from last month, and a little history last week to understand how the company came to be where it is, we have a decent understanding of what U.S. Bancorp is and what it offers. Its high level of profitability and its diversity puts it in close competition with our current leader, Mellon Bank. In fact, I can't say which I favor currently. Not yet, anyway. Plus, we still have Norwest to review to round off our five finalists.

By the way, for more Foolishness on yesterday's topic of dividend growth, read Randy Befumo's Fool on the Hill column from August of last year, called "Income Rising."

Fool on!

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8/26 Close

Stock Close Change CPB $52 9/16 - 7/16 INTC $83 -1 13/32 JNJ $76 7/8 + 7/8
Day Month Year History Drip (0.53%) (1.19%) 11.02% (5.45%) S&P 500 (0.79%) (3.26%) 11.72% 13.96% Nasdaq (1.66%) (5.57%) 12.59% 10.93%
Last Rec'd Total # Security In At Current 08/03/98 4.125 CPB $54.395 $52.563 07/01/98 9.724 INTC $80.239 $83.000 08/07/98 6.543 JNJ $70.138 $76.813
Last Rec'd Total # Security In At Value Change 08/03/98 4.125 CPB $224.38 $216.82 ($7.56) 07/01/98 9.724 INTC $780.21 $807.05 $26.84 08/07/98 6.543 JNJ $458.92 $502.58 $43.67 Base: $1800.00 Cash: $286.03** Total: $1812.49

The Drip Portfolio has been divided into 76.682 shares with an average purchase price of $23.474 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

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