The financial crisis hit everyone hard, but no one got it worse than the banking sector.
Smaller banks, like Indy Mac and Wachovia, went out of business as larger banks swooped in and “rescued” them, helped along the way by the government.
Those who survived the buyouts were obligated to take TARP funds to insure against failure, whether they needed the funds or not.
Still, because they were forced into buying up assets, better-capitalized banks emerged even bigger than before the crisis began, and now they’re looking like a decent place to invest again.
As attractive as those bigger names may be at the moment, there are other less obvious and more overlooked banks that represent an even better opportunity going forward…
A Low-Risk and Profitable Financial
The banks that I have in mind fulfill a few special requirements.
First, not only did they weather the crisis intact, they’ve continued to perform better as the economy has improved.
Second, they’re free from both the burdensome legacy issues of Bear Stearns and the massive real estate portfolios of Wells Fargo.
Third, and most importantly, these banks have balance sheets that can be understood and trusted.
The top name in the bunch is U.S. Bancorp (NYSE: USB), based in the Midwest.
Not only does it fit the bill for all of the above requirements, but USB was never forced to recapitalize during the crisis like so many others.
It accomplished this feat by never losing focus of its target market – people who could afford to pay their bills.
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Sure, business slowed down for USB from 2008 to 2010, just as it slowed down for everyone.
But what matters is how it emerged from the crisis…
Long story short: Since 2010, USB’s earnings have exploded higher and higher. Just last quarter it reported earnings of $1.3 billion – up more than 27% from the same quarter last year.
Non-performing loans continued to decline from levels already lower than its competitors and shares are currently trading at 52-week highs.
Most significantly, the company raised its dividend by 56.5% this past quarter. Some competitors also raised their dividends, but not nearly as much as USB.
It was able to do this and announce a 100 million-share buyback. Those aren’t the actions of a bank in trouble, but of one that sees much stronger growth ahead.
Without the share buyback, the company could’ve doubled its dividend. My bet is that the dividend will continue to increase in the quarters ahead, ultimately reaching the pre-crash level of $0.425 per quarter. (That’s up more than 100% from the current $0.195, based on earnings per share growth.)
Why am I so confident?
USB will report earnings per share of around $2.75 this year and is projected to earn $2.98 per share in 2013. And this is in an environment where the interest rate spreads are low and loan generation is just beginning to show signs of life.
In 2007 – the last time USB raised its payout (for 2008) to the highest level of $0.425 – it earned $2.42 per share and was heading into a decline.
Now it’s heading into an upswing and will record its highest earnings per share in the past few years, pre- and post-crash combined.
Bottom line: All bank stocks aren’t created equal. USB has a history of running its business in a low-risk fashion. Nevertheless, it’s proven time and again that it can increase its earnings and dividends right up there with top-tier financial companies. (That could be one of the reasons Warren Buffett’s Berkshire Hathaway owns nearly 70 million shares of the company.)
Ahead of the tape,