USB US Bancorp

Following the announcement of the stress test results, U.S. Bancorp (USB) has announced a hike in its dividend and a new share repurchases authorization.

The Federal Reserve has evaluated U.S. Bancorp’s capital position under a two-year financial catastrophe environment. Following the review, the Fed had no objection to the company’s request to increase its dividend and other capital distributions.

As a result, U.S. Bancorp made a 56% hike in its dividend to $0.195 per share per quarter from $0.125 per share paid earlier. The increased dividend is payable on April 16, 2012, to shareholders of record as of the close of business on March 30, 2012.

Moreover, U.S. Bancorp also announced a 100 million share repurchase authorization. The company can buy back the shares through March 2013 in the open market or in privately negotiated transactions. It replaces the current share buyback authorization. The company will hold the shares as treasury shares and may reissue those for its corporate functions.

Our Take

We believe that U.S. Bancorp has a disciplined approach to capital management and capital redeployment remains its top priority. In fact, management expects to return 60–80% of earnings to shareholders in the form of dividends and buybacks over the long term. Such shareholder-friendly approach inspires investors’ confidence in the stock.

Notably, during the fourth quarter of 2011, U.S. Bancorp’s capital position remained strong. Capital generated from earnings resulted in improved metrics both sequentially and year over year. Moreover, all regulatory ratios of U.S. Bancorp continued to be in excess of “well-capitalized” requirements. Hence, a sturdy capital position makes the company well poised for returning back capital to shareholders.

Besides U.S. Bancorp, the other major banks on Wall Street that have cleared the stress test requirements -- and therefore increased their capital redeploying efforts through dividend increases and share buybacks -- include Wells Fargo & Company (WFC) and JPMorgan Chase & Co. (JPM).

Going forward, we believe that U.S. Bancorp’s diverse revenue stream, improving credit quality and solid capital levels are impressive.  Though a low interest rate environment and regulatory issues remain our concerns, we believe that the company’s loangrowth will be encouraging.

We also believe that the passing of the stress test along with the capital redeployment plans will serve a positive catalyst for U.S. Bancorp’s stock price.

U.S. Bancorpcurrently retains the Zacks #3 Rank, which translates into a short-term Hold rating.

 
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