Home>Video>This Wide-Moat Bank Could Reap the Benefits of a Tax Cut

This Wide-Moat Bank Could Reap the Benefits of a Tax Cut

Wed, 1 Mar 2017

U.S. Bancorp is well positioned should a tax cut be implemented, but the rally in bank shares means it doesn't look like a bargain today.

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Video Transcript

Eric Compton: One issue currently on the forefront of investors' minds is: what are future tax rates are going to look like, and what does this mean for stock valuations? One key area we don't hear too many people talking about is the question of: Who is going to harvest the value of any future tax cut over the long term? And we think Morningstar's moat methodology is especially important when trying to answer this question. In general, we think banks with the widest moats will benefit the most over the long term, which brings us to U.S. Bancorp. 

U.S. Bancorp is one of only two wide-moat U.S. banks, and we think this bank has one of the best competitive positions among our regional banks. This allows U.S. Bancorp to compete on pricing better than its competitors while still garnering good returns. This is important because after a tax cut is implemented, the size of the economic pie up for grabs increases, and competition for that pie will also increase, and this is where a moat is important. We think no-moat banks will have a difficult time retaining the value of a tax cut over time, and this value will ultimately be passed on to their clients in the form of more competitive pricing on bank products. However, a wide-moat bank like U.S. Bancorp will be better positioned and will actually be able to retain a portion of that increased economic pie for itself and its shareholders.

With that being said, bank stocks have had a strong run over the last several months. Many names are up over 30%, which isn't a sustainable rate for this industry. We don't view shares of USB as undervalued at this point, but we do view them as a name to watch on any pullback. We think the moat concept is particularly important for investors looking at no-moat banks, where current stock prices probably imply they will retain more value over the long term than we think is likely.

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