If U.S. Bancorp (NYSE:USB) repeats its performance of the last 25 years, then a $10,000 investment in the bank's stock will be worth somewhere in the neighborhood of $210,000 at the end of the next quarter century.
This is based on the fact that U.S. Bancorp's median annual return on equity since 1990 was 17.8%. It also assumes that the bank allocates its quarterly net income equally between dividends, share buybacks, and retained earnings, and that all dividend payouts are immediately reinvested into the company's stock at 1.9 times book value.
To be clear, I don't think U.S. Bancorp will actually generate an 18% return on equity during the next 25 years. Heightened regulatory and compliance costs are driving down profitability. Increased capital requirements will have a similar impact. And intensified competition from Silicon Valley upstarts and others will inevitably weigh on margins as well.
But even if U.S. Bancorp generates only a 14% average return on equity between now and 2040 -- which, in my opinion, is a reasonable assumption -- then investors at today's price would still multiply their money more than tenfold between now and then.
All of this assumes, of course, that the Minneapolis-based bank will continue to maintain the underwriting and operational discipline that made it one of the best-run banks in the United States during the past three decades. Neither of these things can be taken for granted; but if any bank could do so, it's U.S. Bancorp.
Much like Wells Fargo, U.S. Bancorp has long prided itself on keeping its expenses low. "Being a low-cost provider gives one a tremendous strategic advantage," former CEO Jerry Grundhofer said more than a decade ago. "It allows you to deal with challenges, be competitive on the asset and liability sides of the balance sheet, and take care of customers."
Its success is clear from its efficiency ratio, which measures the amount of a bank's net revenue that's consumed by operating expenses. While most banks have efficiency ratios in the 60% to 70% range, if not higher, U.S. Bancorp's typically falls between 50% and 60%. This is critical because, as I've discussed previously, a bank's efficiency ratio is the best indicator of not only profitability, but also risk management.
All of this assumes similarly that U.S. Bancorp will be able to survive the handful of financial and economic disruptions that investors should expect to come between now and 2040. It's anybody's guess whether it will be able to do so; but if the past is any indication of the future, then it certainly isn't an unreasonable assumption.
I say this for two reasons. First, even at the nadir of the financial crisis, U.S. Bancorp never once recorded a quarterly loss. And second, it was one of only two large traditional lenders that the Federal Reserve expects to generate earnings if the U.S. economy were to be broadsided by an equally severe crisis in the future -- check out the second chart here.
In short, U.S. Bancorp gives investors, and particularly those interested in bank stocks, a legitimate chance to earn quadruple-digit returns during the next quartercentury. I don't own its shares now, but I soon will, and I'd encourage all prudent and patient investors to consider following suit.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.