U.S. Bancorp (NYSE:USB) investors will continue to receive rich dividends, as the commercial banking giant detailed plans to raise its dividends from the current level of 23 cents a share to 24.5 cents beginning Q2 2014.  The dividend hike was cleared by the Federal Reserve as a part of its annual review of the largest financial institutions, along with the bank’s plan to repurchase $2.3 billion in shares by the end of Q1 2015. Given the bank’s roughly 1.8 billion outstanding shares, the capital plan entails a total payout of a little more than $4 billion to shareholders over the next four quarters.
We actually expected the bank to return somewhere in the vicinity of $5 billion to investors over the period. This is easily justifiable given the bank’s strong capital position, which is unencumbered by the additional capital requirements many of its larger peers face under Basel III norms, as well as from its plain vanilla traditional banking model which stands to gain substantially once the interest rate environment improves. U.S. Bancorp’s decision to limit the payout to $4 billion leads us to believe that the bank is maintaining a cash buffer to be able to explore acquisition options over the year. After all, the bank’s penchant for innovation and strategic acquisitions have played a key role in helping it create a name for itself in the big-bank league.
We maintain a $43 price estimate for U.S. Bancorp’s stock which around its current market price.
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U.S. Bancorp has been pretty consistent with its dividend growth policy historically, raising dividends at least once a year between 1998 and 2008.  The quarterly dividend figure peaked at 42.5 cents a share in 2008, after which the downturn forced a substantial cut in dividends to 5 cents a share starting Q1 2009. Since 2010, the dividend growth has been on track again, with U.S. Bancorp increasing dividends each year to the current 23-cents-a-share level.
The table below summarizes U.S. Bancorp’s capital return figures for each year since 2005 and has been compiled using figures reported in annual reports:
|(in $ mil)||2005||2006||2007||2008||2009||2010||2011||2012||2013|
|Common Stock Dividends||2,245||2,359||2,785||2,959||1,025||383||817||1,347||1,576|
Assuming that the bank’s board approves the share price hike starting Q2 2014, the bank will pay shareholders $0.245 per share for three quarters – implying total dividends of $0.965 per share for 2014. This would suggest total dividend payments worth around $1.75 billion for the bank this year, assuming the number of shares remain constant (though it is likely to decline given the buyback plan). Notably, this figure is just 60% of the amount U.S. Bancorp handed out as dividends in 2008 before the downturn forced it to shrink payouts. Also, the bank’s proposed share buyback plan of $2.3 billion is only marginally higher than the $2.25 billion plan it put in place last year.
We include dividend payouts and share repurchases in our analysis of U.S. Bancorp in the form of an adjusted dividend payout rate as shown in the chart below. And we expect U.S. Bancorp to slowly increase this payout rate to 85% of its net income by the end of our forecast period.Notes:
- U.S. Bancorp Receives Results of Comprehensive Capital Analysis and Review; Federal Reserve Did Not Object to Company’s Capital Distribution Plan, U.S. Bancorp Press Releases, Mar 26 2014 [↩]
- Dividend History [↩]