5.5% From U.S. Bancorp – Is It Enough?

U.S. Bancorp (NYSE:USB) has issued a new series of preferred stock. The details are below:

The prospectus can be found here.

U.S. Bancorp was incorporated in Delaware in 1929 and operates as a financial holding company. It provides a full range of financial services, including lending and depository services, cash management, capital markets, and trust and investment management services. The bank also engages in credit card services, merchant and ATM processing, mortgage banking, insurance, brokerage and leasing. U.S. Bancorp is the parent company of U.S. Bank National Association.

U.S. Bancorp has the following preferred stocks outstanding:

The preferred stocks have the following pricing:

Of all the issues, from a yield perspective, I like the new issue the best. I would prefer to own the Series M as it is a fixed to float structure (and therefore has a shorter duration), but the yield-to-call at 3.12% is not sufficient to own the series.

In order to judge whether the preferred is attractive, it must be considered versus the alternatives available. The following table shows U.S. Bancorp preferred stock versus preferred stock of its regional bank peers as well as national bank peers.

Of all of the preferreds above, from a yield perspective, I would go with the Wells Fargo (WFC) Series R (WFC.PR) fixed to float- despite the bank’s stumbling on nearly every consumer product it offers. Many investors, however, are price/premium sensitive; for those investors, I would select the Bank of America (BAC.PK) Series K (BAC.PK) as it has a higher yield and a palatable dollar price. The BAC issue, however, is a fixed rate issue and will therefore have greater duration exposure than either the USB or WFC issues.

The stripped yield of the peer group (graphically):

The new USB issue has a lower stripped yield than the majority of the peer group.

The yield-to-call of the peer group (graphically):

The new USB issue has a lower yield to call than the majority of the peer group.

As the table below shows, U.S. Bancorp is the highest rated issuer of the peer group, one reason that it has a lower yield than the majority of its peer group (the “less worry” premium).

To get a feel for how USB has traded historically, a comparison between USB and Wells Fargo:

USB Versus Wells Fargo:

The spread between WFC and USB is near its wides, more due to the issues plaguing WFC than USB getting tighter.

USB Versus BBT:

The spread between USB and BBT is near its tights as BBT has traded at lower yields.

I also like to look at the preferred peer group from different angles. One of them is the yield advantage of the preferred stock to the common stock. The preferred should have a higher yield as it has no voting rights and limited price upside. The following table shows the preferred yield advantage of the peer group issues:

While the USB preferred stock, on average, has a lower yield advantage than the peers, the new Series compares favorably to the peer group.

The yield advantage (graphically):

I also like to look at the peer group versus the risk-free rate (in this case, the 10-year Treasury note) as it shows the risk premium an investor receives. The table below shows the risk premiums of the peer group issues:

From a risk premium perspective, USB has a smaller risk premium than the majority of its peers (due to the lower yield), which is appropriate given the higher ratings and financial profile of the issuer.

The risk premium (graphically):

Equity snapshot:

Chart

USB Total Return Price data by YCharts

The common stock of U.S. Bancorp has underperformed its peers over the last year.

Bottom line: Versus the peer group, I like the new U.S. Bancorp Series K due to the financial profile of the bank and the balance of yield and proximity to par. I would prefer a fixed to float structure for the mitigation of duration risk, but the USBpM trades at a premium to par and has a low yield-to-call. For income investors, the new issue can serve as a highly rated diversifier within an income portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.