U.S. Bancorp (USB) is a bank holding company that offers a diversified mix of financial services, including traditional retail banking, wealth management, commercial banking, and payment services. Founded in 1863, U.S. Bancorp is now an $83 billion (by market cap) banking juggernaut that employs nearly 70,000 people. Operating as the fifth-largest American bank by deposits, U.S. Bancorp has branches in 26 different states (primarily in the Midwest and West). U.S. Bancorp reports results across five business segments: Consumer & Business Banking, 41% of FY 2020 revenue; Payment Services, 24%; Corporate & Commercial Banking, 19%; Wealth Management & Investment Services, 12%; and Treasury and Corporate Support, 4%.

The banking business model is one of the oldest business models in existence. The fact that banking has been around since ancient history tells you a lot about its staying power. And that staying power is grounded in the necessity of banking within society. That necessity and staying power makes a bank an attractive asset to invest in for any long-term investor. But a bank is even more attractive because of its float – the low-cost, low-risk source of capital that’s built up by taking deposits and doing business, which can be used to earn a return on. It’s making money from OPM – other people’s money. And because bank assets tend to be very sticky, the returns can be highly lucrative and predictable.

Perhaps that’s why Warren Buffett has over $7 billion invested in U.S. Bancorp. Another reason Buffett might be invested so heavily in U.S. Bancorp? Growing dividends, which Buffett is known to have an affinity for (as do I). Dividend Growth, Growth Rate, Payout Ratio and Yield The bank has increased its dividend for 10 consecutive years. That’s about to be 11 consecutive years, as they’ve already pre-announced a plan to increase the dividend by 10% starting in Q3. That’s pretty much right in line with their five-year dividend growth rate of 10.9%. And that double-digit dividend growth is layered on top of the stock’s current yield of 3.0%. This market-beating yield, by the way, is 30 basis points higher than the stock’s own five-year average. And with a low payout ratio of 39.5%, the dividend is easily protected and positioned to continue growing. I like dividend growth stocks in what I refer to as the “sweet spot” – a yield of between 2.5% and 3.5%, paired with a high-single-digit (or better) dividend growth rate. This stock is squarely in the sweet spot. CFRA rates USB as a 4-star “BUY”, with a 12-month target price of $64.00. I came out slightly high this go around. Averaging the three numbers out gives us a final valuation of $61.54, which would indicate the stock is possibly 8% undervalued.

Bottom line: U.S. Bancorp (USB) is a high-quality bank benefiting from durable competitive advantages. It has the Warren Buffett “seal of approval” for good reason. With a market-beating yield, double-digit dividend growth, a low payout ratio, 10 consecutive years of dividend increases, and the potential that shares are 8% undervalued, long-term dividend growth investors would be wise to consider investing alongside Warren Buffett in this company.

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