U.S. Bancorp Has Nice Dividend Growth Despite Declining Fundamentals

Jul.18.07 | About: U.S. Bancorp (USB)

Dividends Matter reader Daniel has requested that we have a look at U.S. Bancorp (NYSE:USB), which trades on the NYSE. Let’s see if Daniel has found a candidate for our superior dividend yielding portfolio.

Company Profile:

From Yahoo Finance

U.S. Bancorp operates as the holding company for U.S. Bank that provides commercial banking and financial services in the United States. The bank engages in generating deposits and originating loans. Its deposit products include checking accounts, savings accounts, money market savings, and time certificates of deposit accounts. The bank’s loan portfolio comprises commercial loans and lease financing; commercial real estate; residential mortgage; and retail loans, including credit card, retail leasing, home equity and second mortgages, and other retail loans.

USB has a market capitalization of $57.15B, and employs over 50,000 people.

Company Fundamentals:

Unfortunately, I was not able to find information on the return on invested capital other than the 5 year average of 7.6%, and last year’s ROIC of 8.08%. However, I do have the return on equity numbers. The 10-year average is 19.7%, and the 5-year average is 20.9%. The ROE handily beats out the ROIC in this case. And sure enough, if we check debt, USB has a ton of it. Its total debt is 77.9% of its capital.

The equity growth rate has been slowing at a rather rapid pace. Over the 10-year period, the equity growth rate is 12.4%. Over 5 years, it drops in half to 6.04%, and last year’s equity growth rate was 3.42%.

Earnings per share growth rate has been better. Over the 10-year period, it had a growth rate of 14.59%, and over 5 years, a comparable 14.97%. Last year’s EPS growth rate was 5.33%.

Sales growth rates have been on the decline as well, although they have been holding fairly steady in the 4% range over the last 4 years.

Dividend Fundamentals:

USB currently yields an impressive 4.82%. That handily exceeds the dividend yields on both the S&P 500 index, and the DJIA. In fact, it beats them when you add up both its dividend yields together!

Not only does it pay a very nice dividend, but USB has had excellent dividend growth over the last 10 years. I am talking a dividend growth rate of 19.13% over a 10-year period. And it has maintained the excellent growth rate with a 5-year rate of 14.14%, 3-year rate of 17.88% and a 1- year rate of 13.01%.

Now, the dividend payout ratio has increased over this time period from a low of 36% to the current high of 54%. I'm not sure how much more room there is to move this dividend payout ratio up.

And, cash flow growth rates have been on the decline. The last 2 years reported growth rates of 5.58%, and 2.92% respectively.

Valuations Models:

From a yield perspective, this stock must be cheap considering that it is paying out a hefty 4.82%. However, the 5-year average is a hefty 4.59%! So yes, this stock is cheap in comparison, but not as cheap as one might have thought. Our model price based on yield is $34.86. At the current price of $33.20, that is a discount of 4.76%.

Using the Graham number, the model price is $25.78. That implies a premium of 28.8%. Not bad considering the types of stocks that Graham favored.

Using the discounted present value method, I used the following inputs:

  • A future EPS growth rate of 6.04% (although the analysts have forecast 8%, I used the more conservative number derived from the historical EQUITY growth rate over 5 years).
  • A future P/E of 12.08 (although the historically low P/E is 12.2, investors typically are only willing to pay twice the future EPS growth rate).
  • A dividend yield of 4.59% (the 5 year average high dividend yield).
  • A future dividend growth rate of 13.01% (the 1 year dividend growth rate).
  • Using these inputs, my model price is $29.83. That is only a premium of 11.28%.

    See my calculations here.

    Here is the 1-year stock price chart:

    USB Stock chart

    You can see that the price has been dropping steadily since mid-February.


    This stock definitely has a juicy dividend yield, and has historically produced very nice dividend growth. All 3 valuation models support that USB is currently priced attractively. The declining fundamentals are definitely a concern though.

    Is this stock worth adding to our portfolio of superior dividend payers? Does it have further to fall?

    Full disclosure: I do not own any shares in USB.