As the broader market continues to significantly underperform, stocks that generate high dividend income have become a popular alternative among investors. One of the best dividend stocks out there is US Bancorp (USB 1.51%), the fifth-largest bank in the country with $591 billion in assets.
US Bancorp has one of the highest dividend yields in its industry, and it is a favorite of Warren Buffett's, as it is one of the 10 largest holdings in his Berkshire Hathaway portfolio. Let's take a look at why this is a dividend stock to hold on to.
Good earnings in a tough economy
US Bancorp, the parent company of U.S. Bank, beat earnings estimates in the second quarter, posting revenue of $6 billion, up 4% year over year. However, net income was down about 22% to $1.5 billion due to higher provision for credit losses, caused by the worsening economy, and costs associated with its acquisition of MUFG Union Bank, which will close in the second half of this year.
Revenue was driven by a 10% increase in net interest income to $3.4 billion, fueled by aggressive interest rate hikes by the Federal Reserve. What is even more promising, however, is that loans grew by 10% year over year and 3.6% from the previous quarter. Another good sign was that noninterest income was only down 3% year over year and up 6% from the previous quarter on higher trust and investment management fees, as well as increases in credit and debit card revenue.
NYSE: USB
Key Data Points
In a quarter where the economy shrank by 0.9%, following a 1.6% decline in the first quarter, these growth numbers are pretty impressive for a bank, which is typically cyclical and moves with the direction of the economy. While it's not clear where the economy is headed, US Bancorp looks to be in a good position to navigate it.
Some key indicators are moving in the right direction -- the bank's net charge-off ratio declined to 0.2% from 0.25% a year ago, and delinquent loans were down to 0.35% from 0.47% in the second quarter of 2021.
Also, its common equity tier 1 (CET1) ratio is 9.7% for the second quarter, down slightly from 9.9% a year ago. That is well above the 7% minimum CET1 ratio established by the Federal Reserve, which includes a 2.5% buffer. This indicates that the bank has enough liquidity to withstand severe economic stress.
US Bancorp is well-positioned to raise its dividend
After passing the Fed's stress test, the bank said it would make a decision on whether or not to increase its dividend or restart share repurchases after it closes on the MUFG Union Bank deal, possibly this quarter.
Currently, US Bancorp pays out a quarterly dividend of $0.46, which is up from $0.42 a year ago this quarter. It has a yield of 3.86%, higher than the sector average of 3.18%.
Further, US Bancorp has a payout ratio of 36%, which means it pays out 36% of its earnings in dividends. That ratio falls in the sweet spot, as you don't want to pay too much to sustain your dividend, or too little. Also, US Bancorp has increased its dividend annually for the last 11 years straight -- a sign of stability, having come through two bear markets in the past three years.
Looking forward, US Bancorp should benefit from the acquisition of MUFG Union Bank. It expands the bank's presence on the West Coast and brings in some 1 million consumer customers and 190,000 small business customers.
US Bancorp Chairman, President, and CEO Andy Cecere said he believes this acquisition, and other smaller recent deals, open up opportunities to connect US Bancorp's banking customers with its payment products and its payment customers with its banking products -- as there is plenty of room to grow in each of those areas. He also said he believes the bank can expand and grow revenue among small business customers by 25% to 30% over the next few years.
While the market remains uncertain, US Bancorp has gotten through this last half year in pretty good shape, and when it comes out on the other side, it should be primed for growth -- including in its dividend.
