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What Does Warren Buffett See in US Bancorp?

BERKSHIRE HATHAWAYWarren Buffett is one of the most well-respected money managers in history, so, when his Berkshire Hathaway has a large position in a company, it is generally worth taking note. US Bancorp (USB) is one such position. It is one of the largest positions in Buffett’s portfolio. As of December 31, 2011, Berkshire Hathaway had $1.9 billion invested in this stock.

US Bancorp is also quite popular amongst the 350+ hedge funds we track – a fact that further highlights the value of this stock. At the end of last year, there were 38 hedge funds with US Bancorp positions in their 13F portfolios. Andreas Halvorsen’s Viking Global had nearly $600 million invested in US Bancorp at the end of last year. Ric Dillon, Lee Ainslie, David Dreman, Israel Englander, and Ken Griffin are also all in favor of the company.

US Bancorp reported strong earnings results for 2011. Last year, its net revenues increased by $944 million compared with 2010 while its loan loss provision fell $2.013 billion. As a result, US Bancorp’s earnings for 2011 increased by 47% to $4.872 billion – and, this was no one-off. The company has demonstrated a positive earnings growth trend over the past couple of years and it is believed that such growth will continue in the future. Analysts expect US Bancorp to make $2.74 per share in 2012 and $2.98 per share in 2013, versus $2.55 per share for the trailing 12-month. Its earnings are expected to grow at an average of 9.22% per year over the next couple of years.

In addition to robust earnings growth, US Bancorp has also been boosting its EPS by repurchasing its outstanding shares. The company has a share repurchase authorization of 100 million shares through March 2013. It has already bought back 22 million shares over the past year and another 16 million shares during the first quarter this year. We are optimistic about US Bancorp’s financial ability to repurchase shares. The company has prudent underwriting practices and a strong balance sheet. Its Basel II Tier 1 common equity ratio is 8.4%, exceeding the proposed 7% minimum. The strong capital position provides US Bancorp with the flexibility of buying back shares as well as capturing other opportunities. Over the past year, US Bancorp spent $32.7 billion in investing activities, up from $16.4 billion for 2010. The increased investment expenditure indicates that US Bancorp will continue to use its financial strength to gain market shares in the near future.

US Bancorp’s solid capital position also enables the company to have the flexibility of paying out dividends regularly. US Bancorp’s current dividend yield is 2.5%, versus 2% for the 10-year Treasury bonds. The company’s low payout ratio of 22% and decent growth rate of 9% both indicate that it has the capability to further increase its dividend payments, which is, of course, good for investors. According to US Bancorp management, its capital return generated by share buybacks and dividends is targeted at 60-80% over time.

Like most financial stocks, US Bancorp is trading at low multiples. The company’s current P/E ratio is around 12, on par with the industry average of 11.58 but a discount to the S&P 500 average of 15.84. US Bancorp’s closest competitors include Wells Fargo & Co (WFC) and Comerica Inc (CMA). Wells Fargo looks more appealing than US Bancorp when it comes to valuation.

Analysts expect Wells Fargo to earn $3.27 in 2012 and $3.67 in 2013. Its P/E ratio for 2013 is 9, compared with 10.6 for USB. Further, Wells Fargo’s annual earnings growth is expected to be 10.09%, also slightly higher than the 9.22% for US Bancorp. On the other hand, Comerica’s valuation level is relatively higher compared with that of US Bancorp. Its 2013 P/E ratio is 11.77.

We like both US Bancorp and Wells Fargo, but we like the latter more. Hedge funds seem to agree, generally preferring Wells Fargo over US Bancorp. At the end of 2011, there were 68 hedge funds with Wells Fargo positions in their 13F portfolios, including Warren Buffet. In fact, he is even more bullish about Well Fargo than he is US Bancorp. Buffett had $10.6 billion invested in Wells Fargo at the end of the four quarter.  Tom Russo, Ric Dillon, Lee Ainslie and Bill Miller are also fans of the company Wells Fargo.

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