In a filing last week, Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%), the massive conglomerate run by legendary investor Warren Buffett, reported that it had significantly trimmed its position in large regional lender U.S. Bancorp (USB -0.20%).
Berkshire and Buffett first purchased shares of U.S. Bancorp in 2006 and held on to their stake during the brunt of the pandemic as they reduced and/or ended positions in other notable banks like JPMorgan Chase, Goldman Sachs, and M&T Bank.
Berkshire had been trimming its position in U.S. Bancorp gradually for several quarters leading up to the big sale, but up until now, no one really knew that it was going to sell off a sizable piece like this. Let's take a look at what this means for U.S. Bancorp and why Berkshire is selling now.
Selling a solid bank stock
Since Berkshire purchased U.S. Bancorp the bank was long seen as one of the best in the industry. It generated consistent returns, which is something bank investors are going to put a premium on.
USB Return on Equity data by YCharts
U.S. Bancorp regularly generated above a 10% return on equity since 2006 and in most years it was around or above 15%, which is excellent. The bank has a great commercial franchise and is a great steward of credit, which is arguably the most important metric for any bank.
It diversified away from being a traditional commercial bank by building out a big payments business that offers retail payment solutions, global merchant acquiring, and corporate payments, which make up roughly a quarter or more of the bank's total earnings, depending on the segment's performance. Management also pushed real-time payments hard, which the bank has been at the forefront of.
Recently, U.S. Bancorp received all necessary regulatory approvals for its acquisition of the U.S. banking division of the Japanese lender Mitsubishi UFJ Financial Group (MUFG 0.50%). The acquisition will push U.S. Bancorp close to $700 billion in assets, making it the fifth-largest bank in the U.S. It will also give U.S. Bancorp a solid presence in California and 190,000 new small business clients, the core customer at U.S. Bancorp.
While I am not opposed to the acquisition, some investors don't love big moves like this because they can (in some instances) change the strategic direction of a company. Furthermore, big acquisitions can be difficult to integrate and pull off and don't always create as much value as some might assume, so perhaps Buffett didn't like the move.
Buffett's bank moves can be baffling
Buffett is clearly one of the greatest investors ever and Berkshire is managing hundreds of billions of dollars, which requires a much different mindset than your average retail investor. But I must say I've found it difficult to understand some of Buffett and Berkshire's bank moves since the pandemic.
In 2020, Berkshire sold a lot of its bank holdings not necessarily because the banks weren't being managed correctly, but because the company wanted to reduce its overall exposure to the sector given all of the uncertainty at the time. But a lot of those bank stocks Berkshire sold performed well during 2020 and 2021 and look well positioned long term.
U.S. Bancorp's stock is down more than 21% this year and it's trading at a historically low valuation. The bank is also about to generate some of its best operating leverage (growing revenue faster than expenses) in about five years, so it seems like an odd time to sell.
But U.S. Bancorp still trades at a relatively high valuation compared to the rest of the industry, so perhaps Berkshire and Buffett think the bank's best days are behind it in terms of its long-term performance. Berkshire seems more focused on bank value plays, as evidenced by the firm's purchase of shares in Citigroup and Ally Financial earlier this year.
