Earlier today, US Bancorp
I commend US Bancorp for cutting its dividend (although it really should have done so earlier) and on its rationale for doing so. One incentive for the cut is to redeem the government's $6.6 billion capital investment "as soon as is prudently possible." In US Bancorp's case, the investment amounted to a stick-up orchestrated by the government -- the bank did not request the money, nor did it require taxpayer support.
CEO Richard Davis also said that "from a practical standpoint," a cut in the dividend is the least dilutive way to raise capital. Last October, I wrote that funding dividend payouts through heavily dilutive share offerings was folly.
Multibillion-dollar profits ... yes, profits
Even though headlines concerning multibillion-dollar bank losses have become alarmingly commonplace, US Bancorp remains solidly profitable. It earned nearly $3 billion ($1.61 per diluted share) in 2008.
Given those circumstances, it's entirely possible that the government will try to impose conditions attached to this investment retroactively. The sooner US Bancorp can renounce this tithe, the better off it will be.
There's a lesson here
US Bancorp's move now adds to the pressure on other banks. Three that look highly likely to follow US Bancorp's lead are Wells Fargo
Based on the lowest estimates, shares of US Bancorp are now trading at 13 times 2009 earnings per share and 8.5 times 2010 EPS. It's well worth a patient investor's time to look at this well-run lender's shares while the trigger-happy are throwing them out.
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Fool contributor Alex Dumortier, CFA, has a beneficial interest in Wells Fargo and BB&T, but not in any of the other companies mentioned in this article. US Bancorp and BB&T are current Motley Fool Income Investor picks, and JPMorgan Chase is a former one. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.