It may not be as big as JPMorgan Chase or Bank of America. In fact, U.S. Bancorp (USB 0.32%) is only about one-fifth the size of JPMorgan, as measured by assets under management. But don't let its relatively small size fool you. U.S. Bank's got plenty to offer its customers as well as its shareholders.
The question is, does it offer enough of the right stuff for you and your portfolio?
One thing U.S. Bancorp doesn't do
The first thing to know about U.S. Bancorp is that it's surprisingly different from most of the more familiar banking stocks. It's usually categorized as a regional bank, although that's more a reflection of its size than its geographical reach. All told, it's got just under $600 billion worth of assets under its umbrella, versus JPMorgan Chase's $3.3 trillion. Yet the company operates more than 2,000 bank branches in 26 different U.S. states. It just so happens to be heavily exposed to less metropolitan markets, with many of its branches found in neighborhoods rather than on busy city streets.
Its smaller size isn't U.S. Bancorp's only distinguishing factor to consider, however, or even the most important one. It's different from BofA, JPMorgan, Citigroup, and a handful of other bank-like entities such as Charles Schwab and Goldman Sachs for a far more meaningful reason. What makes it unique is that it doesn't operate a major capital market/underwriting business that connects corporations with investors.
On the surface that seems like a missed opportunity. And, in some ways it is.
Investment banking is a double-edged sword, however. It's lucrative when the economy is roaring and the market is soaring. This business evaporates quickly, though, and often with little to no warning. For example, BofA's investment banking business is about half of what it was in mid-2021. Goldman Sachs' second-quarter investment banking fees were down about 20% year over year.
When the underwriting business hits a wall, it's a lot of lost revenue to offset.
U.S. Bancorp never hits that wall though -- at least not anywhere near as hard as bigger names in the banking business do. Its more consistent mix of revenue may limit the company's bottom line, but at least U.S. Bank doesn't dish out huge surprises that can upend its stock.
One thing U.S. Bank does
U.S. Bancorp isn't unique simply by virtue of not being waist-deep in the investment banking business. It's unique in another way that even some of its current shareholders overlook. That's its payment services business, which accounts for roughly one-fourth of its total operating profit.
Most financial service outfits offer intuitively related add-on services to their mix of offerings. After all, why not? They've already got customers looking for solutions to other kinds of money problems. It would be short-sighted to not fill in such a gap when you've already got the necessary tools to solve a problem.
U.S. Bancorp's payment services arm is a bit of a standout, though, catering to smaller and medium-sized businesses that are often overlooked (or at least underserved) by the payment card industry's usual middlemen.
It's not a high-growth business. And, it probably never will be. It's a reliable business with relatively high profit-margin rates, with the world increasingly using cards the way it used to use cash to pay for goods and services. This arm can smooth out any profit turbulence that would otherwise result from interest rate volatility.
Connecting the dots
Is U.S. Bancorp the right stock pick for you? As always, it depends on your goals and risk preference.
If above-average growth is your goal and you can stomach the inevitable swings from stocks of financial companies that are in several different highly cyclical businesses (like the aforementioned investment banking, but also high-risk lending, or active equity trading), then no, U.S. Bank isn't your best bet.
If instead, you're looking for a consistent company with a strong, reliable dividend, U.S. Bancorp deserves a look.
USB Revenue (TTM) data by YCharts
That's especially the case right now while the dividend yield stands at 5%. Sure, the company missed last quarter's earnings and revenue estimates. Take a step back and look at the bigger picture, though. This smaller bank still has a great long-term track record of sidestepping many of the pitfalls too many other banks stumble into.
The kicker: The analyst community feels it's undervalued and underestimated, too, rating it well above a hold, with a consensus price target that's 10% above the stock's present price.
