A lot of people; including the New York Federal Reserve, are asking “are smaller banks like US Bancorp better?” In fact, the New York Fed asks that question in a new paper.
Notably, Fed researchers Linda S. Goldberg and April Meehl believe the level of complexity at US banks is too high, Reuters reports. In addition, the paper; Complexity in Large U.S. Banks, states banks have not shrunk since the financial meltdown of 2008.
To explain, Goldberg and Meehl believe American banks are too big and too complex. Hence, they think American banks are more likely to fail than smaller financial institutions.
IS US Bancorp Too Big to Fail?
Under those circumstances, many will investors will ask if smaller financial institutions like US Bank; or US Bancorp (NYSE: USB), are a better risk.
For instance, US Bancorp reports revenues of $5.233 billion for 4th Quarter 2018. In contrast, Buffett favorite Wells Fargo (NYSE: WFC) reports revenues of $20.459 billion for the same period.
However, US Bank is still large with 3,067 branches and 4,471 automatic teller machines (ATMs) in operations. Comparatively, Wells Fargo operates overs 5,000 branches and 13,000 ATMs.
Hence, US Bancorp is a large financial institution with fewer resources than Wells Fargo. Thus, US Bancorp could be more likely to fail because it makes less money than Wells Fargo.
Is US Bancorp making money?
In contrast, US Bancorp is making a lot of money from its smaller footprint. For instance US Bank reports a gross profit of $5.433 billion, an operating income of $2.153 billion, and a net income of $1.856 billion on 31 December 2018.
In addition, US Bank reports an operating cash flow of $2.65 billion, a financing cash flow of $3.478 billion, and a free cash flow of $2.65 billion for 4th Quarter 2018. Thus, US Bank is making a lot of money from its operations.
Tellingly, US Bank had $21.453 billion in cash and equivalents on December 31, 2018. However, Wells Fargo had $173.287 billion in cash and equivalents on the same day.
US Bancorp is more Likely to fail than you think
Under those circumstances, US Bank is more likely to fail because it has less money. To explain US Bancorp could lack the cash to cover big losses or pay a big fine.
Thus, US Bancorp fails Warren Buffett’s “idiot nephew test.” To explain Buffett likes to invest in companies that can survive even if your idiot nephew is running them.
In detail, companies Uncle Warren considers “idiot-nephew proof” are simple, easy to run, and generate lots of cash. Wells Fargo passes those tests because its businesses; lending money, issuing mortgages, offering bank accounts, and cashing checks are simple. More importantly Wells Fargo generates vast amounts of cash.
For instance, Wells Fargo had no problem paying a $2.09 billion fine from the federal government in August 2018. To explain, regulators fined Wells Fargo because it knowingly issued mortgage loans based on bad information. However, such a fine could take nearly 10% of US Bancorp’s cash reserve.
Is US Bancorp a Value Investment?
Therefore, I think US Bancorp was overvalued at $48.59 a share on 22 March 2019.
Consequently, think Wells Fargo; which traded $48.27 a share on the same day is a far better deal. For instance, Wells Fargo paid a dividend of 45¢ on 1 March 2019.
However, US Bank is a respectable dividend stock. For instance, US Bancorp shareholders received a 37¢ dividend on 15 January 2019. In addition, US Bank’s dividend grew by 7¢ in 2019 rising from 30¢ in April 2018.
US Bancorp shareholders experienced a dividend yield of 3.04%, an annualized payout of $1.48, and a payout ratio of 36.4% on 22 March 2019. Plus, US Bank’s dividend has grown for the last years.
In comparison, Wells Fargo offered investors a dividend yield of 3.72%, an annualized payout of $1.80 and a payout ratio of 39.% on the same day. Moreover, Wells’ Fargo offers seven years of dividend growth. Thus, I consider, Wells Fargo better deal than US Bancorp because it offers less risk and a comparable dividend for the same price.
Buffett’s Idiot Nephew is right about US Bancorp
In the final analysis, US Bancorp is a good stock, but you can find less risk and comparable dividends at Wells Fargo for a similar price. That is why Buffett admits to owning $1.263 billion worth Wells Fargo shares in his 2018 Berkshire Hathaway (NYSE: BRK.B) Shareholder letter.
Once again, understanding, Buffett’s idiot nephew can help you avoid risk and make money. However, you will have to put up with the idiot nephew’s questionable ethics if you want to make money from him.