The goal of income investing is to pick stocks that are most likely to meet your income requirements over time, and one good place to start is businesses that have a history of raising their dividend. Regional bank U.S. Bancorp (USB -0.20%) was among the vast majority of financial stocks that cut their dividend during the Great Recession. However, the bank is stronger now than it was then, and it paid out 6.3% more dividends to shareholders in 2020 than it did in the pre-pandemic year of 2019.
Does this make U.S. Bancorp a buy for income investors? Let's take a closer look at the bank's fundamentals and valuation to answer this question.
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A disappointing quarter but not all is lost
U.S. Bancorp came up short of the analyst consensus for both revenue and diluted earnings per share (EPS) in the fourth quarter of 2021. It reported $5.68 billion in total revenue, which was a 1.2% decline from the same period the year before. This narrowly missed the average analyst forecast of $5.74 billion. Meanwhile, U.S. Bancorp's EPS came in at $1.07; while that represents 12.6% growth over the year-ago period, it came in just below the average analyst prediction of $1.10.
Still, there's plenty of good news for the stock.
For one thing, U.S. Bancorp has been aggressively investing to improve its payments capabilities, which is a service that few banking customers currently use. For context, just 28.2% of U.S. Bancorp's 1.1 million business banking customers use both the company's business banking and payments services. This should give U.S. Bancorp plenty of room to cross-sell to its business banking customers and drive future revenue and earnings growth, which could also open up more growth avenues for these businesses in the process. With 82% of U.S. consumers using digital payments last year, U.S. Bancorp is helping its business banking customers to modernize their accepted payments.
This is precisely why CEO Andy Cecere expects that U.S. Bancorp will be able to grow its small-business banking relationships by 15% to 20% over the next few years. Over an already large customer base, this is very encouraging.
A major catalyst and a strong balance sheet
Another reason to be about toward U.S. Bancorp's future has to do with inflation being near a four-decade high. That's because CFO Terry Dolan indicated in his opening remarks during the recent earnings call that U.S. Bancorp anticipates the Federal Reserve will likely announce three rate hikes this year to fight inflation. This is expected to help U.S. Bancorp's net interest income increase at a mid-single-digit pace over the $12.6 billion generated in 2021.
U.S. Bancorp's growing payments platform and the upcoming rate hikes have analysts expecting a solid 10% annual earnings growth rate over the next five years.
What makes the stock even more appealing is the strength of its balance sheet, which I'm measuring using the common equity tier 1 (CET1) ratio, which measures a bank's core capital relative to its risk-weighted assets. U.S. Bancorp's CET1 ratio improved from 9.7% in Q4 2020 to 10% in Q4 2021. For context, U.S. Bancorp's 10% CET1 ratio is significantly higher than its 7% legal requirement (4.5% plus 2.5% of a bank's risk-weighted assets). This means that U.S. Bancorp's balance sheet should be healthy enough to hold up in most economic environments.
Quality at a discount valuation
At recent prices, U.S. Bancorp's stock has advanced almost 30% higher over the past year. Even with such significant capital appreciation, it looks like it is still reasonably priced.
For instance, U.S. Bancorp is trading at a forward price-to-earnings (P/E) ratio of 11.4. This is basically in line with the regional bank average of 11.3. But since U.S. Bancorp's annual earnings growth rate of 10% is moderately higher than the regional bank industry average of 7%, the stock should arguably be trading at a premium to its industry.
Additionally, U.S. Bancorp is trading at a price to tangible book value of 2.6. This is significantly lower than its 13-year median price-to-tangible book value of 3.1, which also suggests the stock is trading at an attractive valuation.
Finally, U.S. Bancorp pays a well-covered 3.1% dividend yield. Because it paid out just 34.5% of its earnings to investors last year and its earnings growth is likely to remain strong, it should be able to build on its 11-year dividend growth streak in the years ahead. That's why income investors should consider buying the stock at today's prices around $60.
