There are a number of metrics that can be used to illustrate U.S. Bancorp's (NYSE:USB) industry-leading performance, but one of the most important is the growth rate in its book value per share. Not only does this reflect a bank's fundamental performance, but it also weighs heavily on stock price.
U.S. Bancorp's book value per share has grown 90% since the beginning of 2010. That ranks it first out of 23 banks on the KBW Bank Index, where the average bank has seen the measure increase 47% over the same stretch.
This isn't a complicated metric to calculate or understand. To calculate it, take U.S. Bancorp's shareholders' equity, which is at the bottom of its balance sheet, and then divide that by the Minneapolis-based bank's outstanding share count. This comes out to $25.05.
How fast or slow should a bank expect its book value per share to grow? There is no set answer to this. It depends instead on where the economy is at in the business and interest rate cycles. If business is booming and interest rates are high, a bank's book value per share will grow faster than if the economy and interest rates are in the dumps.
The pace at which a bank's book value per share grows is also impacted by the percentage of earnings it retains. In other words, the more a bank pays out via dividends and buybacks, the less it retains to bolster its book value.
In the low interest rate environment we're currently in, which weighs heavily on bank profits because it lowers loan yields, it's reasonable to expect a bank's book value per share to increase by 5% or more a year, with many banks coming in above that. U.S. Bancorp is among the latter, given that its book value per share has nearly doubled in less than eight years.
U.S. Bancorp has accomplished this through solid fundamental performance, not by retaining an especially large share of earnings relative to peers. Over the last 12 months, the nation's largest regional bank by assets distributed roughly three-quarters of its earnings via dividends and buybacks. That's right in line with its peer group average.
None of this should come as a surprise to current shareholders in U.S. Bancorp, as it's long been one of the best-run banks in the country. But for investors new to it, or bank stocks in general, this is a good metric to keep one's eye on.