The Fed's Stress Test & U.S. Bancorp: 18% Dividend Hike & $2.25B Share Buyback Plan Cleared

Being boring is not always a bad thing and U.S. Bancorp ( USB ) stands out as a shining example. The bank is slowly but surely making its way to the big-bank league armed with nothing more than its plain vanilla traditional banking model and a penchant for innovation and strategic acquisitions. The bank was one of the few that announced a strong increase in dividend payout last year after the Federal Reserve's stress test (see The Fed's Stress Test All-Stars: JPMorgan, Wells Fargo, U.S. Bancorp ), and looks like the string of record earnings it generated over recent quarters helped it with the Fed this year too.

The bank received the green signal from the Fed to raise quarterly dividends from the current level of 19.5 cents a share to 23 cents late last week. It was also cleared to repurchase shares worth $2.25 billion over the year.

We maintain a $36 price estimate for U.S. Bancorp's stock which is about 10% ahead of its current market price.

See our full analysis for U.S. Bancorp here

U.S. Bancorp has been pretty regular with its dividend growth policy for well over a decade, raising dividends at least once a year since 1998. The quarterly dividend figure peaked at 42.5 cents a share in 2008, after which the downturn forced a substantial cut in dividends to 5 cents a share starting Q1 2009. Since 2010, the dividend growth has been on track again, with U.S. Bancorp increasing dividends each year to the current 19.5-cents-a-share level.

The table below summarizes U.S. Bancorp's capital return figures for each year since 2005 and has been compiled using figures reported in annual reports:

(in $ mil) 2005 2006 2007 2008 2009 2010 2011 2012
Common Stock Dividends 2,245 2,359 2,785 2,959 1,025 383 817 1,347
Shares Repurchased 1,855 2,789 1,983 - 139 - 514 1,856
Total 4,100 5,148 4,768 2,959 1,164 383 1,331 3,203

Assuming that the bank's board approves the share price hike starting Q2 2013, the bank will pay shareholders $0.23 per share for three quarters - implying total dividends of $0.885 per share for 2013. This would suggest total dividend payments worth around $1.65 billion for the bank this year assuming the number of shares remain constant.

That combined with the proposed $2.25 billion share buyback plan means that the bank will return $3.9 billion cash to its investors this year. We include dividend payouts and share repurchases in our analysis of U.S. Bancorp in the form of an adjusted dividend payout rate as shown in the chart below. And we expect U.S. Bancorp to slowly increase this payout rate to 80% of its net income by the end of our forecast period.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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