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Shares of U.S. Bancorp (USB - Analyst Report) have gained momentum following its strong third quarter results last week, which included earnings per share that topped the Zacks Consensus Estimate. This provider of banking products and services has recorded positive earnings surprises in the last ten quarters with an average beat of 5.5%. The Zacks #2 Rank (Buy) stock currently enjoys a dividend yield of 2.3%.

Third Quarter EPS Moves Higher

On October 17, U.S. Bancorp reported third quarter 2012 earnings per share of 74 cents, topping the Zacks Consensus Estimate of 73 cents by 1.4% and the year-ago earnings of 64 cents by 15.6%. The upsurge was due mainly to growth in revenue and a lower provision for credit losses.

Net interest income climbed 6.1% year over year to $2.8 billion. Non-interest income increased 10.4% to $2.4 billion. However, net interest margin contracted 6 basis points (bps) to 3.59%. Additionally, the company's non-interest expenses escalated 5.4% to $2.6 billion over the same period.

Credit metrics continued to improve at U.S. Bancorp. The provision for credit losses was $488 million, down 6.0% from the year-ago quarter with net charge-offs showing a declining trend. Net charge-offs (excluding covered loans) were 1.04% of average loans outstanding, down 38 bps year over year.

Rising Earnings Momentum

The past 7 days have seen 17 out of 28 estimates for 2012 move higher, lifting the Zacks Consensus Estimate by 1.1% to $2.87. For 2013, eleven of 28 estimates moved north over the same time frame, boosting the Zacks Consensus Estimate by 0.7% to $3.06.

The estimates reflect year-over-year improvements of about 19.0% for 2012 and 6.7% for 2013.

Dividend Payment

U.S. Bancorp hiked its dividend by 56% to 19.5 cents early this year. Currently it pays a quarterly dividend of 19.5 cents per share, affirming a yield of 2.3%.

The stress test clearance justifies U.S. Bancorp’s capital strength and its solid business model. Reflecting capital strength during the third quarter, the company was able to return 67% of its earnings to its shareholders as dividends and share repurchases, which is within the range of its long-term goal of returning 60% to 80% of earnings.

Reasonable Valuation

Shares of U.S. Bancorp currently trade at 11.6x 12-month forward earnings, an 11.5% premium to the peer group average of 10.4x. Its price to book ratio of 1.8 is also at a significant premium to the industry median of 0.8. However, the company has a trailing 12-month ROE of 15.9% compared with the peer group average of 8.1%.

Chart Shows Strength

The stock has been consistently trading above its S&P 500 and 200 days moving average since June 2012.

U.S. Bancorp is one of the strongest banks with rising estimates, strong growth projections, a decent dividend yield and reasonable valuation. Moreover, with consecutive dividend increases and improving credit quality, it offers attractive upside potential.

Headquartered in Minneapolis, Minnesota, U.S. Bancorp provides various banking products and services. The company was founded in 1863 and conducts business through 3,080 banking offices and 5,085 ATMs. With a market capital of about $63.2 billion, U.S. Bancorp competes with Wells Fargo & Company (WFC) among others.


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