Will US Bancorp cut its dividend?

I've been following US Bancorp (USB) pretty closely through this credit crisis -- thanks to Jim Jubak. He thinks it is one of the few banks that will emerge from this crisis victorious, and I tend to agree with him.

The stock currently yields ~12%, but much of that is due to the fear of a dividend cut caused by the most recent earnings release. Jim Jubak's comments are below.

Will US Bancorp follow the lead of so many of its peers in the banking industry and cut its dividend? The question isn't academic to me: I had added this stock to Jubak's Picks in April 2008 because it then paid better than 5%.

Since the company's Jan. 21 announcement on fourth-quarter earnings, a majority of investors on Wall Street have been thinking the dividend is headed for a cut. A stock-price drop of 12.5% on Jan. 22 left the yield on the shares at 12.1%. You don't see that kind of a yield on a bank stock unless the market is convinced the company will cut its payout.

I can certainly see why investors think that. The bank didn't exactly give a ringing defense of the dividend in its earnings conference call. Executives said the company believes it will be able to cover the dividend from earnings in 2009 but noted that it reviews the dividend every 90 days -- which puts the next review in March -- and that the bank has no intention of continuing the current dividend if earnings don't cover the payout.

The real issue then, as the company said in its statement, is earnings for the rest of 2009. On Jan. 21, US Bancorp reported earnings of 15 cents a share. That's a profit -- unusual for a bank these days -- but still 7 cents a share below what Wall Street had expected. The problems? There were $253 million in losses on securities and a $635 million increase in provision for credit losses. All in all, charges and losses chopped 34 cents a share out of earnings.

It's also clear that the bank's business, like that of all banks I know of, is still getting worse. Nonperforming assets climbed to 1.14% in December, and the bank said it anticipated that nonperforming assets -- that is, loans that the bank can't collect on in a timely fashion -- will continue to climb in 2009. It's cold comfort to investors that the bank's performance continues to be so much better than other banks'. The increase in nonperforming assets to 1.14% in December is only a modest increase from the 0.88% in September. That indicates the bank's lending standards continue to hold up to a very difficult economy.

The bank's operating results, in fact, were quite impressive. Loans grew 17% (12.7% excluding acquisitions) and deposits 15.2% (9.6% excluding acquisitions) from the fourth quarter of 2007. (In November 2008, the company acquired Downey Savings and Loan and PFF Bank and Trust from the Federal Deposit Insurance Corp.) Net interest income grew 22.6%. Tier 1 capital remained at a strong 10.6%.

So will US Bancorp cut the dividend or not? Unfortunately, it's a danger and, also unfortunately, uncertain. It depends on how long the economy struggles and how big the losses get on the bank's portfolio of loans. I still think US Bancorp will be a winner in the current crisis, and this quarter's results are evidence that the bank is picking up loan and deposit volume as customers opt for the bank's relative safety.

Source:
Fed looks like one more shaky bank
Jubak's Journal, 1/23/2009 12:01 AM ET

New Project

I've started creating a R API to the opentick data servers. My goal is to provide a native R interface to opentick real time and historical market data. I have reservations about being able to make it solely R-based, due to threading issues I don't totally understand at the moment.

Even though I've read of quality issues with opentick's data, the price can't be beat for small, part-time traders (i.e. me).

Due to the upgrading of its network infrastructure, opentick is not currently accepting new users. That should change in the near future, however. You can sign up to be notified when the upgrades are complete.

For those who already have accounts with opentick, you can find the very-alpha source code on r-forge.

Disclaimer: This software is not endorsed in any way by opentick corporation and I am not affiliated with opentick corporation.

More Upside to Come?

Quantifiable Edges has an interesting post regarding large gaps up in downtrends. Rob writes,

Buying gaps up of 0.75% or more during downtrends was actually profitable. In this case, 58% of the 105 instances finished with the SPY closing higher than it opened. The net total of the movement from open to close was a gain of about 26%...

I suspect short-covering is a big reason that large gaps tend to spark additional buying in downtrends but not in uptrends. Stops get blown through overnight and when they see the market getting away from them, panic-covering ensues.

The Nasdaq gapped up more than 1% today. If there is indeed more upside to come, I would be surprised if the Nasdaq Composite can sustain prices above the top of the 3-month trading range around 2,400.

Two-for-two!

Markets rallied today for the second day in a row, with very broad and large price gains. But what do these two days mean? Today's volume was higher than yesterday's on both the NYSE and NASDAQ, but they're both near their average volumes during the past few weeks of selling. In short, volume wasn't terribly impressive.

Looking at the table below, we see that market internals are not particularly strong.

	11/27/2007			11/28/2007
	NYSE	AMEX	NASDAQ	NYSE	AMEX	NASDAQ
% Adv Issues	66.0	43.1	54.1	84.8	67.0	76.0
% Dec Issues	31.9	49.7	42.1	13.6	27.5	20.8
% Adv Volume	71.8	72.6	79.0	94.8	87.0	88.1
% Dec Volume	27.2	26.6	20.1	5.0	12.5	11.7
New Highs/Lows	0.08	0.20	0.15	0.45	0.33	0.41

Advancing issues and volume were strong today, but advancing issues were weak yesterday. Probably the most troublesome is the ratio of new highs to new lows. Both yesterday and today new lows outnumbered new highs by at least a 2-to-1 margin! For what it's worth, today saw half as many new lows as yesterday. I expect some selling into this 'rally' later this week.

Big Rally, Small Volume

Today's rally was staggering - with the Dow, S&P, and NASDAQ up 2.5%, 2.9%, and 3.5% respectively. But how much participation was in the move? Is this simply a relief rally from the past four sessions of selling, or the beginnings of a new advance?

100 million fewer shares traded on the NASDAQ compared to yesterday, but volume was close to its average over the past few weeks. Today was also a 9-to-1 up day on the NYSE and NASDAQ, where 90+ percent of the total volume traded was attributed to advancing issues. However, the number of issues making new 52-week lows outnumbered those making new highs by a wide margin on both exchanges.

The 9-to-1 up day is encouraging but hasn't been a reliable indicator of a new uptrend by itself. However, the lack of total volume and the number of issues making new lows is cause for concern. Time will tell, but this appears to be a relief rally...

Bad Timing, or Bad Reasoning?

My employer sends a small newsletter with each quarterly 401(k) statement. I skim over them, since they usually contain fairly basic information. This quarter, one of the articles was a little too basic...

The article discouraged participants from "timing" the market. I generally agree with that principle, but not for the reasons given. The article concluded that timing the market is risky because (1) if you missed the market's top-performing days, your portfolio's overall return would drop dramatically (see Chart 1), and (2) many mutual funds have rules against "market timing" (I think they really meant "rules against frequent trading").

My first thought after reading the first point was: what would have the performance been if I had missed the market's worst-performing days? When I look at Chart 2, I can't help but wish I would have missed those 10 worst days and doubled my annual average return over the period.

Granted, it's extremely improbable to be able to miss the 10 worst performing days; but I would think it equally improbable to happen to miss the 10 best performing days.

(Note: the charts above use S&P 500 returns net of dividends. Including dividends would not change the analysis in a meaningful way, since the dividends lost over 5 or 10 days would be negligible.)

As I mentioned, I would generally agree trying to time the market isn't a good idea; but it's not because you might miss those best days. Timing the market is extremely difficult and most would be better off with a well diversified portfolio.