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Berkshire Hathaway (BRK-B) has an equity investment portfolio worth over $360 billion, as of the end of the 2022 first quarter.

Berkshire Hathaway’s portfolio is filled with quality stocks. You can follow Warren Buffett stocks to find picks for your portfolio. That’s because Buffett (and other institutional investors) are required to periodically show their holdings in a 13F Filing.

Note: 13F filing performance is different than fund performance. See how we calculate 13F filing performance here.

As of March 31st, 2022, Buffett’s Berkshire Hathaway owned more than 126 million shares of U.S. Bancorp (USB) for a market value of $6.7 billion. U.S. Bancorp represents about 1.9% of Berkshire Hathaway’s investment portfolio. This marks it as the 9^th largest position in the portfolio, out of 49 stocks.

This article will analyze the financial services company in greater detail.
 

Business Overview

U.S. Bancorp traces its lineage back to 1863 when the First National Bank of Cincinnati opened for business. It has since grown to 70,000 employees, and about $25 billion in annual revenue.

The bank has expanded from a regional player to a national powerhouse in recent years, becoming the fifth-largest bank by assets in the U.S. It competes mostly in traditional banking activities, but also offers wealth management, payment, and investment services.

On April 14th, 2022, U.S. Bancorp reported first-quarter earnings and diluted earnings-per-share came to $0.99, which was down significantly compared to $1.45 in the prior-year period. Net revenue was $5.6 billion, up 2.4% year-over-year. The company’s results were positively impacted by loan growth, as well as net interest income and lower noninterest expenses.

Net interest income was $3.2 billion, up from $3.1 billion a year ago. The net interest margin was 2.44%, down from 2.50% in the first quarter of last year.

Average total loans were $313 billion, up from $303 billion in the prior quarter. Average total deposits were $454 billion, up from $450 billion in the prior quarter.

Source: Investor Presentation

Noninterest expense was $3.50 billion in the first quarter, up from $3.38 billion a year ago. Provisions for credit losses were $112 million, a huge decline from the benefit of $827 million a year ago. These provisions directly impact earnings, which clarifies a large portion of the decline in year-over-year earnings.

We estimate that U.S. Bancorp can generate $4.30 in earnings-per-share for the fiscal 2022 year.
 

Growth Prospects

Impressively, U.S. Bancorp has grown its earnings per share every year from 2009 until 2020, starting from the great financial crisis and ending as a result of the COVID-19 pandemic. Very few banks can claim such a record.

Rising lending rates are a growth driver for the company’s earnings, and this is set to continue in the near term. However, the current low net interest margin and moderate loan growth may weigh on the company’s growth rate.

U.S. Bancorp is also in the process of acquiring MUFG Union Bank’s core regional banking franchise from Mitsubishi UFJ Financial Group (MUFG). The purchase price is $8 billion, which includes $5.5 billion in cash and roughly 44 million shares of USB. This will provide MUFG with a 2.9% stake in U.S. Bancorp.

U.S. Bank will gain over 1 million consumer customers and roughly 190,000 small business customers on the West Coast, as a result of the acquisition. And the company anticipates adding $58 billion in loans and $90 billion in deposits based on MUFG Union Bank’s June 30^th, 2021, balance sheet.

The combined entity will be a leader in serving customers in California, Washington, and Oregon. The acquisition is anticipated to be 6% accretive to earnings per share in 2023 and 8% after it is fully integrated.

U.S. Bancorp has been consistent in its share repurchases, by repurchasing 2.5% on average over the last nine and five years. Continued share repurchases should also fuel per-share results going forward.

We project that the company can continue to grow earnings by 6% annually through 2027.
 

Competitive Advantages & Recession Performance

U.S. Bancorp’s competitive advantage lies in its impressive operating history and first-rate management team. The company operates as a regional bank, but at a tremendous scale, and for that reason, it has been more resilient through recessions than its larger peers.

While many banks struggled to remain in business during 2009 amidst the great financial crisis, U.S. Bancorp’s earnings were not even cut by half. In fact, following the recession, U.S. Bancorp was in better shape when compared to its competitors than before.

U.S. Bancorp has raised its dividend for ten consecutive years so far. We see the payout remaining below 50% of earnings in the coming years. U.S. Bancorp’s dividend appears safe, and we see no risk of a cut at this point. U.S. Bancorp last raised the dividend by 9.5% to an annualized payout of $1.84. We estimate the company can continue growing the dividend at a rate of roughly 6% per annum.
 

Valuation & Expected Returns

Shares of U.S. Bancorp have traded for a 5- and 10-year average price-to-earnings multiple of 13.0 and 12.9, respectively. Shares are now trading below both of these averages, which indicates that shares could be undervalued at the current 10.9 times earnings. As a result, we believe there is a potential for a valuation tailwind in the intermediate-term.

Our fair value estimate for USB stock is 11.5 times earnings. If this proves correct, the stock will benefit from a 3.1% annualized gain in its returns through 2027.

Shares of U.S. Bancorp currently yield 3.9%, which is above its 5- and 10-year average yields of 3.0% and 2.7%% as well. On a dividend yield basis, USB shares seem to be trading below fair value.

Putting it all together, the combination of valuation changes, EPS growth, and dividends produces a total expected return of 10.5% per year over the next five years. This makes U.S. Bancorp a buy.
 

Final Thoughts

U.S. Bancorp is in the midst of a massive acquisition, which will see it become a top leader in West Coast regional banking.

The company has generated an impressive track record, but took a pause during the pandemic, and then hit a new record in 2021. Following normalized results from 2022 and onward, we expect the bank to perform well.

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