Insights

1 Warren Buffett Stock for Rising Interest Rates and a Travel Recovery

Along with most of the banking sector, U.S. Bancorp (NYSE: USB), the fifth-largest bank by assets in the U.S., has struggled this year, with its stock down roughly 15%. Despite the fact that most banks will benefit from rising interest rates, investors have grown more bearish on the sector considering that there is a higher likelihood of a recession over the next two years.
Legendary investor Warren Buffett and his company Berkshire Hathaway have owned U.S. Bancorp since 2007, and they held onto the stock even as they dumped many bank stocks during the pandemic. U.S. Bancorp is one stock that should benefit this year from rising interest rates and as travel and entertainment spending recovers. Here’s why.
Rising interest rates
U.S. Bancorp certainly isn’t the largest beneficiary of rising interest rates. But like most other banks, it did not foresee the Federal Reserve raising its benchmark overnight lending rate, the federal funds rate, as aggressively as it plans to now. As such, management expects net interest income (NII), the profits that banks make on loans, securities, and cash after covering the cost to fund those assets, and a primary source of bank revenue, to come in higher than they anticipated earlier this year.
Image source: The Motley Fool.

U.S. Bancorp’s CFO Terry Dolan said the bank now expects NII to grow 8% to 11% in 2022 on a year-over-year basis, and total net revenue to increase 5% to 6%. While NII will benefit, lower mortgage banking revenue due to higher mortgage rates significantly slowing demand will serve as a headwind. 
The bank also saw incredibly strong commercial loan growth in the first quarter of the year, with commercial balances up 8% from the linked quarter and 10.5% year over year. Management attributed the strong growth to slowing prepayment rates, increased business activity, and higher utilization of revolving lines of credit. If this loan growth continues — and it may not — I suspect NII to benefit at least to the top end of management’s guidance.
Recovery in travel
One of the big things that sets U.S. Bancorp apart from its peers is its payments business. This segment includes retail payment products such as small-business credit cards, debit cards, and prepaid cards; merchant acquiring solutions, which help businesses accept electronic card payments; and corporate payment solutions. In Q1, total payments revenue made up 26% of total revenue. Total payments revenue of $859 million was up more than 10% on a year-over-year basis and down nearly 5% from the previous quarter.
Image source: U.S. Bancorp.

Business sectors that contribute significantly to U.S. Bancorp’s overall payments business continue to recover, despite plenty of disruptions in Q1, and it’s not abnormal to see revenue in this business decline from the previous quarter in Q1, due to seasonality. Dolan said credit and debit travel spending surpassed pre-pandemic levels. And in March 2022, airline spending came in flat compared to March 2019, the first time that has happened since the pandemic began.
Travel and entertainment spending in the corporate payments business is back to about 75% of pre-pandemic levels. Management believes that the merchant acquiring and corporate payments businesses can grow in the high-single-digit percentage range in 2022 on a year-over-year basis. Overall, Dolan said management expects travel and entertainment spending will strengthen this year, which they view as a “tailwind.”
Management also believes that investments they have made in the payments business are paying off. For instance, the number of customers using the bank’s point-of-sale product, which allows small business banking customers to manage their banking and payments needs on one dashboard, increased fivefold in 2021. 
Is it a buy? 
There’s a reason Buffett has hung on to U.S. Bancorp for as long as he has, and it’s because this is a very well-run bank that has consistently had excellent credit quality in its loan portfolio. The bank should also see revenue rise this year as interest rates increase and the payments business continues to recover. While the short-term outlook is unclear and anything can happen, I believe U.S. Bancorp is a good long-term buy.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. –

Along with most of the banking sector, U.S. Bancorp (NYSE: USB), the fifth-largest bank by assets in the U.S., has struggled this year, with its stock down roughly 15%. Despite the fact that most banks will benefit from rising interest rates, investors have grown more bearish on the sector considering that there is a higher likelihood of a recession over the next two years.

Legendary investor Warren Buffett and his company Berkshire Hathaway have owned U.S. Bancorp since 2007, and they held onto the stock even as they dumped many bank stocks during the pandemic. U.S. Bancorp is one stock that should benefit this year from rising interest rates and as travel and entertainment spending recovers. Here’s why.

Rising interest rates

U.S. Bancorp certainly isn’t the largest beneficiary of rising interest rates. But like most other banks, it did not foresee the Federal Reserve raising its benchmark overnight lending rate, the federal funds rate, as aggressively as it plans to now. As such, management expects net interest income (NII), the profits that banks make on loans, securities, and cash after covering the cost to fund those assets, and a primary source of bank revenue, to come in higher than they anticipated earlier this year.

Image source: The Motley Fool.

U.S. Bancorp’s CFO Terry Dolan said the bank now expects NII to grow 8% to 11% in 2022 on a year-over-year basis, and total net revenue to increase 5% to 6%. While NII will benefit, lower mortgage banking revenue due to higher mortgage rates significantly slowing demand will serve as a headwind. 

The bank also saw incredibly strong commercial loan growth in the first quarter of the year, with commercial balances up 8% from the linked quarter and 10.5% year over year. Management attributed the strong growth to slowing prepayment rates, increased business activity, and higher utilization of revolving lines of credit. If this loan growth continues — and it may not — I suspect NII to benefit at least to the top end of management’s guidance.

Recovery in travel

One of the big things that sets U.S. Bancorp apart from its peers is its payments business. This segment includes retail payment products such as small-business credit cards, debit cards, and prepaid cards; merchant acquiring solutions, which help businesses accept electronic card payments; and corporate payment solutions. In Q1, total payments revenue made up 26% of total revenue. Total payments revenue of $859 million was up more than 10% on a year-over-year basis and down nearly 5% from the previous quarter.

Image source: U.S. Bancorp.

Business sectors that contribute significantly to U.S. Bancorp’s overall payments business continue to recover, despite plenty of disruptions in Q1, and it’s not abnormal to see revenue in this business decline from the previous quarter in Q1, due to seasonality. Dolan said credit and debit travel spending surpassed pre-pandemic levels. And in March 2022, airline spending came in flat compared to March 2019, the first time that has happened since the pandemic began.

Travel and entertainment spending in the corporate payments business is back to about 75% of pre-pandemic levels. Management believes that the merchant acquiring and corporate payments businesses can grow in the high-single-digit percentage range in 2022 on a year-over-year basis. Overall, Dolan said management expects travel and entertainment spending will strengthen this year, which they view as a “tailwind.”

Management also believes that investments they have made in the payments business are paying off. For instance, the number of customers using the bank’s point-of-sale product, which allows small business banking customers to manage their banking and payments needs on one dashboard, increased fivefold in 2021. 

Is it a buy? 

There’s a reason Buffett has hung on to U.S. Bancorp for as long as he has, and it’s because this is a very well-run bank that has consistently had excellent credit quality in its loan portfolio. The bank should also see revenue rise this year as interest rates increase and the payments business continues to recover. While the short-term outlook is unclear and anything can happen, I believe U.S. Bancorp is a good long-term buy.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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