U.S. Bancorp: Low Risk, High Growth Prospects

| About: U.S. Bancorp (USB)

A recent report from InvestorPlace indicates that Berkshire Hathaway (NYSE:BRK.A) has been selling shares of one big bank, U.S. Bancorp (NYSE:USB), and buying additional shares of two others, Wells Fargo (NYSE:WFC) and The Bank of New York Mellon (NYSE:BK). Is now the time to follow Buffett and sell shares of U.S. Bancorp, or is now the time to start buying them?

That depends on which figure you take a look at when you read the financials. U.S. Bancorp's cash on hand is almost miniscule when compared to Wells Fargo's. On September 30th, U.S. Bancorp had just $9.38 billion in cash on hand, while Wells Fargo had $178.02 billion. The figures also indicate that Wells Fargo's cash on hand has been increasing, while U.S. Bancorp's cash and securities have been falling. U.S. Bancorp actually saw a sharp drop in its cash on hand this year, from nearly $15 million in June to $9.38 billion on September 30th.

The interesting thing is that some of U.S. Bancorp's figures look good, indicating that its strategy of concentrating on basic banking services rather than mortgage underwriting is paying off. U.S. Bancorp's net income has been steadily increasing for the past three years, from $1.4 billion in June 2009 to $5.34 billion on September 30th. The revenues have also been going up in recent years, from $18.64 billion in March 2009 to $22.3 billion on September 30th.

U.S. Bancorp has been able to increase the volume of its business without taking on the level of exposure to mortgages that Wells Fargo has. The problem is that U.S. Bancorp's conservatism seems to have come at a time when the mortgage industry appears to be booming. Wells Fargo has increased its mortgage operations staff by 25% in anticipation of a rebound in home loans, according to Bloomberg. JPMorgan Chase (NYSE:JPM) has also increased its mortgage operations.

Dismal Earnings Figures at Some Big Banks

The interesting thing is that U.S. Bancorp may not need a massive increase in mortgage business to keep growing. The company had diluted quarterly earnings per share (NYSEARCA:EPS) year-to-year growth ratio of 15.63% on September 30th. That is not as good as Well Fargo's ratio of 22.22%, but it is far better than either Bank of America (NYSE:BAC) or Citigroup (NYSE:C).

Bank of America's diluted year-over-year earnings per share ratio was -100% on September 30th. Citigroup's situation was almost as dismal; that bank reported a diluted quarterly year-to-year EPS figure of -87.8%. Neither of these big banks has been able to pay any sort of earnings to investors, so it is easy to see why Bank of America's share price is so low despite its size.

U.S. Bancorp has been able to retain value and increase revenue, even as bigger banks are basically treading water. The problem is that it has not been able to deliver the kind of growth that JPMorgan Chase and Wells Fargo have been going through. JPMorgan Chase's diluted EPS actually increased by 37.25% between September 30th, 2011 and September 30th, 2012.

U.S. Bancorp is a reasonable value buy. It has been able to retain value and deliver respectable earnings in a banking industry that has been in constant upheaval. Even though it has not matched Wells Fargo's performance, U.S. Bancorp has been able to buck some of the trends facing banks.

Like Wells Fargo and JPMorgan Chase, U.S. Bancorp is also well poised to take advantage of the increase in residential lending that some analysts predict, yet it is not betting everything on mortgages the way Wells Fargo is. Unlike Citigroup, U.S. Bancorp's current valuation seems justified by its revenue and EPS figures.

If you're looking for a low-risk banking stock, you'd have a hard time finding a better one than U.S. Bancorp. It has managed to grow its business over the past few years without taking the risks that Wells Fargo has. That alone makes it worth adding to your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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