Please ensure Javascript is enabled for purposes of website accessibility

Why U.S. Bancorp Is 1 of the Biggest Warren Buffett Stocks

By Matthew Frankel, CFP® - Oct 24, 2014 at 8:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Unlike many of the other bank stocks in Berkshire Hathaway's portfolio, Buffett bought U.S. Bancorp before the financial crisis. Why?

Warren Buffett's Berkshire Hathaway (BRK.A -0.27%) (BRK.B -0.14%) has done a great job of scooping up excellent bank stocks over the past several years, and one of the company's biggest bank holdings is U.S. Bancorp (USB -0.67%). As of Berkshire's latest SEC filing, the company owns just over 80 million shares of the bank, which represents about 4.4% of the total.

Source: Wikipedia.

It's easy to understand why Buffett has been a fan of the banking sector over the past several years. After all, valuations plummeted to all-time lows in many cases, and Buffett loves good companies at low prices. However, Buffett has owned shares of U.S. Bancorp since before the financial crisis and has been adding to his position ever since, in both good economic times and bad.

So, why in particular did he choose U.S. Bancorp, and why is he still holding on and adding to his position?

What Buffett looks for
When Warren Buffett looks to invest, there are a few things he looks for.

First, does the company have a "wide moat," or a distinct competitive advantage? For example, some pharmaceutical and tech companies have lots of valuable patents that keep competitors from luring their customers away (such as Pfizer). And some companies use economies of scale to maintain pricing power over their competitors (like Wal-Mart and

Also, Buffett likes to invest in industries that have been around for 100 years and are likely to be around 100 years from now. People will always need healthcare, food, and safe places to put their money, which is why Buffett owns stocks like Johnson & Johnson, Coca-Cola, and Wells Fargo. Will people need things like tablet computers in 100 years? Maybe, but maybe not.

Why U.S. Bancorp?
U.S. Bancorp is somewhat of a rarity among Berkshire's bank holdings because Berkshire bought shares of the bank before the financial crisis. In fact, about 17 million shares were purchased in early 2007, one of the absolute worst times to buy bank stocks. So, why did Buffett like the bank back then?

At first glance, U.S. Bancorp actually looks rather expensive. The company's price-to-tangible book value ratio of 2.85 is well above most of its peers and the other Buffett bank stocks. It's even more "expensive" than Wells Fargo, which is considered one of the most rock-solid banks out there.

USB Price to Tangible Book Value Chart

However, Buffett doesn't need his stocks to be cheap. He just needs fair prices on good companies. And, U.S. Bancorp is definitely a very well-run company. Not only is it one of the most profitable banks in the industry, but it continues to grow at a pretty impressive pace. In the company's recently released third-quarter results, we learned that the company produced year-over-year loan growth of 6.3%, deposit growth of 7.4%, and has 3.7% fewer charge-offs than in the previous quarter.

And, the bank produces sector-leading efficiency numbers, with a return on average assets of 1.51%, a return on equity of 14.5%, and an efficiency ratio of 52.4%. For comparison, Wells Fargo's efficiency ratio was 57.7% in the third quarter (lower is better), and the company's return on assets and equity were 1.40% and 13.1%, respectively.

It's definitely a solid company, but is it still a good buy?
The company certainly isn't cheap, but that doesn't necessarily mean it's not a good value. If you want to invest in U.S. Bancorp, do what Buffett likes to do from time to time: Wait until the stock drops for a reason that has nothing to do with its business, like an overall market correction, or general weakness in the financial sector.

USB Chart

In fact, U.S. Bancorp actually looks like it is somewhat "on sale" right now, thanks to the recent market sell-off, currently trading for about 6% less than it was about a month ago.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$411,050.00 (-0.27%) $-1,120.01
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$273.49 (-0.14%) $0.37
U.S. Bancorp Stock Quote
U.S. Bancorp
$46.12 (-0.67%) $0.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.