According to the latest 13F filings, Warren Buffet's Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) has continued trimming its U.S. Bancorp (USB, Financial), selling 2.471 million shares. After four straight quarters of reducing the position by less than 2%, the holding is now down to 126.417 million shares. While it's not a significant sale, it does signal that Buffett is no longer a buyer of the stock and is willing to sell some shares to free up cash for other opportunities.
This may seem like an odd move considering the growing rhetoric that banking stocks will outperform the market in 2022 due to a rising 10-year Treasury yield; however, key indicators are suggesting that selling this stock may be a good play at the moment, in my view. Here's why I think Buffett may have decided to start reducing the position.
Glitches in the loan portfolio
U.S. Bancorp has roughly 48% of its loan portfolio exposed to real estate projects and commercial real estate in particular. This isn't ideal considering the risk-premia in commercial real estate.
Taking the above into context, even if the 10-year yield rises, it's not really going to benefit the company's loan portfolio as much because spreads won't benefit from the convexity that regular consumer loan originators will benefit from. I personally think we can't categorize this stock with depositary banking stocks that are set to benefit from a rising yield.
The stock is overvalued
A contributing factor to U.S. Bancorp's 36.68% year-over-year gains in stock appreciation has been its 64.91% growth in diluted EPS, but this could be about to shift as analysts predict a 0.32% downturn in year-over-year diluted EPS. A stock's diluted EPS is usually a lagging indicator of a company's stock price.
From a multiples perspective, U.S. Bancorp is overvalued. The stock's price-earnings ratio is trading at a 4.48% sector premium, the price-sales ratio is at a 14.43% premium and the price-to-cash-flow ratio is at a premium of 25.28%.
Dividends at full capacity
Sure, the stock does have an attractive forward dividend yield of 3.04%, but I expect this to be short-lived. The cash payout ratio is higher than 48.57% of the sector, even though the dividend coverage ratio is 13.19% inferior than the rest of the sector.
Considering the metrics mentioned above, it's safe to say that the payout ratio will most likely decrease unless a mass asset taper program is called.
Final word
U.S. Bancorp is a stock that Warren Buffet has benefited from dearly over the past year, but the time may be coming to size down. Based on my analysis, I would not be surprised if the guru were to continue selling.
