Fed Okays U.S. Bancorp’s Plan To Return $4.5 Billion To Shareholders

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USB
U.S. Bank

With U.S. Bancorp (NYSE:USB) having no trouble clearing both rounds of the bank stress tests this year (see Lots Of Winners In The Fed’s 2016 Stress Test, But Deutsche Bank, Santander Stumble Again), the regional banking giant received the Fed’s approval for its plans to return as much as $4.5 billion to shareholders over the next four quarters. [1] The plan entails a 10% increase in quarterly dividends from the current level of 25.5 cents a share to 28 cents a share, along a new share repurchase program to buyback up to $2.6 billion in shares by the end of Q2 2017.

Notably, the year-on-year hike in U.S. Bancorp’s capital return plan is not very high when compared to that for its larger peers. We believe that there are two factors behind the bank’s decision to boost payouts at a modest rate this year: expected pressure on earnings from continued low interest rates, and continued building of a cash buffer to explore acquisition options. As U.S. Bancorp relies on a plain-vanilla traditional banking model to make money, it will see earnings dip this year if the Fed does not hike benchmark interest rates substantially in the near future. This makes U.S. Bancorp’s decision to not hike dividends too much a prudent one. Also, 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, and the bank needs to maintain sufficient cash balances to take advantage of acquisition opportunities as they present themselves.

We maintain a $46 price estimate for U.S. Bancorp’s stock which is about 20% ahead of its current market price.  The price discrepancy can primarily be attributed to the sharp sell-off in bank shares over recent months as fear of the U.K. leaving the European Union grew.

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See our full analysis for U.S. Bancorp here


U.S. Bancorp has been pretty consistent with its dividend growth policy historically, raising dividends at least once a year between 1998 and 2008. [2] 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 25.5-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:

USB_CapitalReturn_2016

As U.S. Bancorp paid 25.5 cents in dividends per share over the first two quarters of 2016, and proposes to pay 28 cents per share over the remaining two quarters, total dividends for the year should be $1.07 per share. This works out to total dividends of around $1.85 billion for the year, assuming the total number of shares outstanding remains constant at the current level of 1.73 billion (although the figure will fall steadily due to share repurchases). Also, the bank repurchased almost $650 million in shares over Q1 2016 and had authorization in place to repurchase another $650 million for Q2 2o16 – taking the total repurchase figure over the first half of the year to $1.3 billion. Taken together with $1.3 billion in proposed purchases for the rest of the year (half of the total proposed repurchases of $2.6 billion), this points to total share repurchases of $2.6 billion in 2016.

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. You can understand how a change in this value affects U.S. Bancorp’s share price by making changes here.

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Notes:
  1. 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, Jun 29 2016 []
  2. Dividend History []