Buffett’s Other Bank: Outperforms Wells Fargo
So far the banking sector is off to a 2nd quarter roll, with JP Morgan (JPM) , Citigroup (C) and Wells Fargo (WFC) all beating on earnings and revenue. The overall financial sector is expected to post the strongest earnings among all 10 sectors in the S&P 500, according to Factset.
So all is good? All is forgiven? Not exactly, right? While Citigroup popped 2% on the news its 2nd quarter earnings rose 42%, any investor has to be comfortable with a business plan that still needs to keep aggressively shedding troubled assets, and has set its sights on emerging market growth. Not exactly a steady-eddy proposition.
And interestingly, despite a strong 2nd quarter earnings report, JP Morgan has actually slid over the past two trading days, compared to Wells Fargo continuing to climb to a fresh 52-week high, as seen in a stock chart.
Short-term moves are anyone’s guess, but perhaps the market is weighing in on the fact that if new capital requirements recommended by a consortium of federal regulators sees the light of day, JPMorgan reportedly will need to build an additional $50 billion or so of cushion. Wells Fargo’s current capital levels are already in line with the proposed new regs.
One way to gauge leverage for financial firms is to check a company’s tangible common equity ratio; as this chart shows, Wells Fargo has overtaken JP Morgan on this front coming out of the financial crisis.
Score one for the plain vanilla business model anchored on commercial and retail lending. If that’s how you’d consider investing in the banking rebound, U.S. Bancorp (USB) should pop up on your radar. It’s the fifth largest bank in the U.S., BAC), Citigroup and Wells Fargo.
For the record, U.S. Bancorp’s 6.6% tangible common equity ratio is about one percentage point lower than Wells Fargo and nearly 1 percentage point higher than JPMorgan.
The managers of the conservative-minded $19.1 billion Oakmark Equity Income mutual fund exited the dicey bank sector seven years ago, watching from the sidelines as the Federal Reserve worked to stabilize the industry. In the second quarter of this year the Oakmark Equity Income team finally felt comfortable enough to dip a toe back into banks, and they chose US Bancorp for their maiden post-crisis bank investment. The managers offered this synopsis of their rationale in their 2nd quarter commentary:
“U.S. Bancorp is a high quality institution in terms of assets, and fees make up nearly half its revenues. The company also has a large payment processing subsidiary, a business deserving of an above average valuation. We perceive management to be both conservative and shareholder-friendly.”
As for the shareholder friendly bit: after taking a painful dividend haircut during the crisis, U.S. Bancorp dividends have grown 84% since early 2012. It’s also made a moderate stab at share buybacks over that stretch -- reducing the share count by more than 3% -- and pushing the stock’s net payout yield (dividend yield and the value of repurchases) close to 5%.
Even a rejuvenated 10-year Treasury note yield can’t compete with that.
As with Wells Fargo, the language to watch coming out of Wednesday’s earnings release will be management’s take on how the jump in long-term rates during the second quarter is expected to impact loan volume going forward. In the first quarter U.S. Bancorp paid out an average 0.80% on its deposit accounts, down from 1.07% a year ago. Still, it saw net interest income fall more than 2.5% in the first quarter.
U.S. Bancorp reported second quarter earnings in line with expectations: 76 cents a share vs. 71 cents a year earlier.
Buffett watchers know that both Wells Fargo and U.S. Bancorp are among the 10 largest stock investments of Berkshire Hathaway (BRK.B). Warren Buffett has been aggressively adding to the WFC stake since mid 2010. Wells Fargo’s 20% position in the Berkshire investment portfolio took the top spot at the end of the first quarter, nudging out long-time leader Coca-Cola (KO), which accounted for 19% at quarter end. Meanwhile, Buffett has pretty much left the U.S. Bancorp position untouched of late.
We won’t have Berkshire’s 2nd quarter portfolio moves until mid August. It will be interesting to see if either bank gets additional dollars. From a simple stock-price chart you’d surmise that U.S. Bancorp has a better valuation story going forward.
But in fact, Wells Fargo has lower trailing 12-month and forward PE ratios than U.S. Bancorp.
And, long-term, U.S. Bancorp has outperformed Wells on a crucial bank-profitability measure: return on assets.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org. You can also request a demonstration of YCharts Platinum.
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