US Bancorp (NYSE: USB) is bucking the current trends in the banking industry by reporting growing revenues. The institution, also known as US Bank, reported revenues of $19.94 billion in December 2014 that grew to $20.09 billion in December 2015.
Okay, that growth is not impressive, but it’s certainly better than JP Morgan Chase (NYSE: JPM), which saw its revenues drop by $1.57 billion during 2015, falling from $95.11 billion in Fourth Quarter 2014 to $93.54 billion a year later. Or Bank of America (NYSE: BAC), where revenue fell by $1.74 billion during the year.
It looks as if US Bank has avoided some of the revenue losses facing the brick-and-mortar banking business. Yet that is not what makes it a value investment; instead, it’s some of the other numbers that US Bank reported for fourth quarter 2015.
US Bank Defies the Odds
- A net income of $5.879 billion.
- A profit margin of 28.61%.
- A diluted earnings per share figure of 3.170.
- A free cash flow of $2.531 billion.
- $8.782 billion in cash from operations.
- $12.86 billion in cash from financing.
- $11.15 billion in cash and short-term investments.
These numbers show us that US Bancorp has quite a bit of float, but is it a value investment? The answer is yes because it is undervalued; US Bank was trading at $40.49 a share on March 14, 2016. It also had a market capitalization of $70.34 billion and an enterprise value of $125.29 billion.
For those looking for a dividend stock, US Bank delivered a 2.49% dividend of 25.5¢. Investors also received a 14.77% return on equity, which seems to make this a good buy and value play.
Can US Bank Keep Defying Banking Industry Trends?
It looks as if US Bancorp has escaped some of the trends that are tearing into business at the monster banks. Two of its bigger competitors, Wells Fargo and JP Morgan Chase, lost revenue last year even though they are far larger.
Chase is the second largest American bank by footprint with 5,555 branches, and Bank of America, with 4,843 branches, is the third largest. The largest U.S. financial institution is Wells Fargo Bank (NYSE: WFC), which reported impressive revenue growth in 2015.
Wells Fargo started 2015 with a TTM revenue of $84.35 billion for Fourth Quarter 2014; that grew to $86.06 billion in December 2015. That’s an increase of $1.71 billion in a year, which is tremendous in today’s banking climate.
Naturally, investors will want to know why business is growing at some banks and not at others. Why has Wells Fargo, with 6,244 branches, reported revenue growth while the comparably-sized Chase has not? The same can be said of US Bank, which offers customers 3,227 branches.
PEST Analysis for US Bancorp
A good way to answer these questions is with a Political, Economic, Social and Technological, or PEST, analysis of US Bancorp. This can help investors determine if US Bank can keep returning dividend yields of 2.46% or not.
Political Factors Affecting US Bancorp’s Future – The political environmental favors US Bank because it is not seen as one of the giant, too-big-to-fail banks. During this year’s presidential campaign, one high-profile candidate, U.S. Senator Bernie Sanders (D-Vermont), has gone out of his way to attack banks and call for their breakup.
There is strong pressure in the Democratic Party and among the general public to increase banking regulation and break up larger institutions. This will not become a reality anytime soon, because the Republicans, who firmly oppose such regulation, control Congress. That could change after the 2020 or 2022 Congressional elections because redistricting brought on by the Census could deliver a Democratic majority in the House of Representatives. How that would affect banking regulation and US Bank is anybody’s guess.
Economic Factors Affecting US Bank’s Future – The major economic factors that could affect US Bank’s future are growing income inequality and its underlying cause: wage and income stagnation in the U.S. Average incomes in 81% of the U.S. have not increased since 2000, and in some areas, they are substantially lower. This could affect banks such as US Bancorp because working- and, increasingly, middle-class households have less ability to pay off loans. More defaults and less overall revenue could be a result.
Increased housing prices could limit home ownership and the demand for mortgages. A related threat is that of a real estate bubble leading to another mortgage meltdown.
Social Factors Affecting US Bank – Popular sentiment seems to be working against banks. The number of credit union accounts in the United States grew to 101 million for the first time in the second quarter of 2015, indicating a desire for a banking alternative.
There is also a growing sentiment against debt and credit. Credit card use is falling among younger Americans, and some of them are forgoing home ownership in order to avoid mortgages. Whether this is a long-term trend remains to be seen, but it could indicate a growing distrust of banks and the financial system.
A social trend that could affect banks is falling car use and ownership, which could lead to decreased demand for auto loans. The rising popularity of alternatives to traditional auto ownership, such as networked transportation solutions and short-term car rentals could accelerate this trend.
Technological Developments That Could Affect US Bank – The growing popularity of payment apps such as Apple Pay, Venmo, Android Pay, PayPal and Chase Pay could lower the use of credit cards and traditional bank accounts.
PayPal in particular, which owns Venmo, could be a major threat because its digital wallets operate a great deal like a bank account and because PayPal itself lends money. Such apps could also increase the demand for some banking sources.
A major threat is that such apps could increase the use of online bank accounts, some of which offer higher interest rates and lower fees. A major opportunity would be for US Bank to develop and deploy its own payment app like Chase is doing. The growing popularity of online lending solutions such as Lending Tree (NASDAQ: TREE) and Lending Club (NYSE: LC) is another threat because they provide an alternative to bank loans.
A long-term threat facing brick-and-mortar banks is the rise of a generation of consumers used to conducting all their financial transactions outside banks. Many American no longer write checks, and a growing number no longer have checking accounts. US Bancorp will face the challenge of marketing services to such individuals.
Despite these developments, the future of US Bancorp looks bright. Its revenue growth will continue for the foreseeable future, and it will continue delivering a healthy dividend to investors.
Disclosure: Your favorite blogger owns shares of Bank of America and PayPal Holdings Inc. (NASDAQ: PYPL).