Years ago, Warren Buffett said at the annual shareholders meeting that what he and Charlie Munger try to do is figure out what a company’s Value Line sheet will look like in ten years. Of course, this can only be done in stable businesses with a good long-term record of performance. It is in that spirit that I made a 5-year projection for U.S. Bancorp (USB) a la Value Line.
U.S. Bancorp is a well run bank with an outstanding long-term record of performance. It is focused on core banking functions – consumer and business banking, wealth management, wholesale banking, trust services and payments – and has minimal exposure to investment banking and other challenges larger banks are facing with capital markets.
My base or mid case assumes annual asset growth over the next five years of 7%. This is reasonable given U.S. Bancorp’s historical performance and given the continued consolidation in U.S. banking. The base case assumes a 2016 ROA of 1.7%, well below the banks pre 2008 returns and reasonable assuming a modest recovery in housing. U.S. Bancorp had an ROA of 1.53% in 2011. Assuming the bank’s P/E in 2016 is 13 (its long-term median P/E), it would reach a price target of $57 and produce annual capital gains of 12.5%.
I also assumed a normalized payout ratio of 45% on the bank’s 2011 EPS of $2.46 for a yield of 3.5%. I assume this yield would grow in line with earnings. The base case would produce a total annual return of 16%.
It is interesting to note that U.S. Bancorp sold for as low as $21 a share in 2011 when Mr. Market was in a worse mood. Buying at that level would have produced >15% IRR, even under the proposed pessimistic scenario. Of course, all else being equal, the price you pay goes a long way in determining your total return and margin of safety.
Prominent holders with material positions include Buffett, Prem Watsa, Glenn Greenberg and Donald Yacktman.
Of course, you’ll need to provide your own assumptions. It is critically important to quantify. It forces you to make your assumptions explicit and see if your portfolio holdings are reasonably aligned with your expectations. (You can’t from New York to L.A. in four hours with a prop plane that tops out at 300 mph.)
I am long U.S. Bancorp.