US Bancorp (USB 2.56%), which is the fifth-largest bank in the country based on total assets, hasn't been immune from the regional banking crisis, and its stock is down 30% in 2023. But this continues a longer history of marked underperformance.
If you invested $1,000 in shares of U.S. Bank five years ago in May 2018, that position would be worth a disappointing $609 today (as of May 23), or a loss of 39%. Compare this to the 54% gain by the broader S&P 500, and it's obvious that investors would've been better off avoiding this bank stock.
Let's take a closer at what led to this terrible performance, and if there's any hope for a different situation for investors.
Looking at the past
A quick look at the company's past financials should provide insights as to why the stock hasn't panned out. Over the five years from 2017 to 2022, U.S. Bank's net interest income is up just 19%, whereas diluted earnings per share (EPS) have only increased by 5%. Higher expenses have clearly pressured the company's profitability.
On the other hand, JPMorgan Chase, which many investors consider to be top-tier financial institution, has seen its net interest income jump 33% over the same time period, with diluted EPS nearly doubling.
Because of U.S. Bank's subpar fundamental performance, the stock has taken a hit from a valuation perspective. The shares carried a price-to-book ratio of nearly 2 about five years ago. And now they trade at a P/B multiple of a little more than 1.
Where it is today
In the most recent quarter (the first quarter of 2023, ended March 31), U.S. Bank beat Wall Street estimates with net revenue of $7.2 billion and diluted earnings per share of $1.04. Net interest income increased 46% year over year, thanks to higher interest rates that the Federal Reserve put in place to curb accelerating inflation. The net charge-off rate did decline from the fourth quarter of 2022, although nonperforming loans, which means the borrower has stopped making payments, are rapidly on the rise.
It was encouraging to see that amid the banking crisis, U.S. Bank's deposit base increased almost 6% from the end of 2022 to the end of March, and now total $510 billion. "We maintain a resilient and diversified deposit base," Chief Executive Officer Andy Cecere highlighted on the Q1 2023 earnings call. "Over half of our deposits are insured and 80% of the uninsured deposits are retail or operational in nature." Being a bank that customers can trust with their hard-earned savings is definitely a positive trend.
A stock to avoid
That's all well and good, but I don't think investors are convinced. Warren Buffett, a legendary capital allocator who knows how to invest in financial institutions better than most, was a longtime shareholder of U.S. Bank through his conglomerate, Berkshire Hathaway. But during the first quarter this year, the company sold off the last of its stake in the bank, a position that Berkshire had been decreasing for some time. That's probably a good sign that retail investors should stay away from the stock as well.
However, even though a top investor is no longer a shareholder, you might still be intrigued by U.S. Bank for a couple of reasons. Shares are down 30% this year, and they currently trade at a price-to-earnings ratio of a little more than 8, which is well below the stock's average valuation during the past five years. Maybe this means there's some upside ahead. Moreover, U.S. Bank pays a dividend yield north of 6%, a sizable income stream that might be extremely valuable for some investors in this type of economic environment.
For what it's worth, I'd follow in Buffett's footsteps and avoid holding the shares in my portfolio. The company's historical track record isn't great, and it's hard to be optimistic about the future given that one of the best investors ever has exited the stock.
