All You Smart Kids: Forget Today’s Yield – 2.5% at US Bancorp – and Focus on Dividend Growth
Like those of other major bank holding companies, US Bancorp (USB) shares used to be a favorite of conservative dividend investors. The Minneapolis super-regional raised its dividend annually for over three decades, until the financial sector’s meltdown broke the string.
US Bancorp’s payout ratio is coming back, thanks in part to a 56% dividend increase that kicked in earlier this year after the company (along with most other big banks) cleared a regulatory “stress test” and got federal permission to boost the amount of cash it sends back to stockholders. While the chart below measures payout over the latest twelve months, the nation’s fifth largest bank by assets actually paid out 29% of earnings in dividends in the first quarter.
US Bancorp officials say the $341 billion asset company wants to “resume normal capital management,” and they’re targeting a return of 30% to 40% of earnings in the form of dividends in the future (with another 30%-40% for stock buybacks). For income investors, the question then becomes how much better the company’s earnings can get. US Bancorp rode out the recession with less pain than many other lenders, and its shares have performed well over the past year, particularly in comparison with industry laggards Citigroup (C) and Fifth Third (FITB).
Earnings re up and margins are wider at U.S. Bancorp. But the stock’s earlier run-up has stalled in the last couple months, as investors grow uneasy about the economy. An opportunity for dividend-minded investors?
US Bancorp has a solid, diverse franchise and is among the industry’s more profitable performers as measured by return on assets.
For all those reasons, the company’s dividend yield seems likely to return, eventually, to something approximating its pre-crisis level. For investors willing to wait, the shares may be worth a look – particularly since the stock has slipped back.
With interest rates discouragingly low, investor interest in dividend stocks has surged. Whenever we yield junkies buy a security for its dividend stream, we’re naturally acquiring the more volatile underlying stock as well. So before committing to any stock, it’s important to check out a company’s fundamentals, and to read its 10-K report.