Warren Buffett’s company Berkshire Hathaway (BRK.A) (BRK.B) first purchased the large regional lender U.S. Bancorp (USB) in 2006. When the pandemic hit in early 2020, Berkshire chose to offload most of its regional bank holdings but hung on to U.S. Bancorp, making it seem like it would be the company’s regional bank of choice for the long haul.
But now Buffett has all but exited U.S. Bancorp after 17 years of ownership. In the third quarter of 2022, Berkshire sold 42 million shares, or roughly 35% of its position in the stock.
The large conglomerate just revealed that it sold another 91% of its existing stake in the fourth quarter, bringing its ownership of U.S. Bancorp down to just 6.7 million shares, which I would expect Berkshire to sell sometime this year. Here’s why Buffett and Berkshire may have had enough of this longtime holding.
What has changed
When I saw that Berkshire had decided to maintain its position in U.S. Bancorp, despite selling other regional banks like M&T Bank and PNC Financial in 2020, the decision didn’t necessarily surprise me. Yes, M&T and PNC are strong performers, but U.S. Bancorp has long been considered an industry-leading bank and has generated better returns over the years.
The bank has also long had strong credit quality and has a strong annual dividend yield currently around 3.87%. Additionally, U.S. Bancorp has been building out a growing payments business, which will look to take advantage of real-time payments as they become more mainstream. Berkshire does own stocks like Visa and Mastercard, so I suspect Buffett didn’t mind and probably even liked the strategy.
So, what might have changed over the last couple of years? Well, I am obviously just speculating and don’t pretend to know what Buffett and the savvy investors at Berkshire are thinking, but U.S. Bancorp recently completed a large acquisition.
In late 2021, U.S. Bancorp announced that it would purchase the U.S. banking operations of the Japanese lender Mitsubishi UFJ Financial Group (NYSE: MUFG). The deal took a long time to complete and also took the bank’s regulatory capital to lower levels than investors may have liked, although U.S. Bancorp expects to build those back up to its prior levels later this year.
I actually like the deal and think it will complement the bank’s strategy moving forward of banking small businesses, which also happen to be customers to which the bank can likely cross-sell its payments products.
But in recent years, banks that have made large acquisitions have seen their stocks dinged up. These kinds of deals are complex, and often the acquirer fails to derive any real revenue synergies from them. With U.S. Bancorp already trading at about three times its tangible book value, or net worth, perhaps Buffett and Berkshire weren’t thrilled about the shift in strategy.
Berkshire is a different kind of investor
While you can learn a lot by watching Buffett and Berkshire, one thing to understand is that Berkshire manages a stock portfolio of more than $339 billion, and therefore has to think differently from a retail investor.
Berkshire may like a stock but decide that the risk-reward proposition doesn’t make it worth investing in. Berkshire may simply decide it wants to reduce its exposure to a certain industry. The key is to watch Buffett and Berkshire’s moves but not live and die by them.
I continue to think U.S. Bancorp will be a good long-term stock to hold, but knowing that Berkshire sold will certainly lead me to do another review of the company and try to further understand what Buffett is thinking.
— Bram Berkowitz
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Source: The Motley Fool