Two large financial firms have just raised their dividends in the past few days, and with those increases comes more good news – acquisitions that should better position them both for future growth.
One of these companies is US Bancorp (NYSE: USB), which acquired another bank to expand its geographic presence, and the other is State Street (NYSE: STT), which bought a rival to make it the world’s largest custodian bank. Let’s see how these moves should benefit these two actions.
US Bancorp acquires MUFG Union Bank
US Bancorp, the holding company of US Bank, the country’s fifth largest bank, has just grown a bit with the acquisition of San Francisco-based MUFG Union Bank. US Bancorp bought the bank from Mitsubishi UFJ Financial Group for about $ 8 billion. It has around $ 133 billion in assets and 342 branches, of which 315 are in California, most of the rest in Oregon and Washington. In addition, the acquisition adds 1 million personal customers and 190,000 small business accounts, while increasing the balance sheet with $ 58 billion in loans and $ 90 billion in deposits. The purchase will strengthen US Bank’s already strong position in California, making it the state’s fifth largest bank in terms of deposits, down from 10th.
US Bancorp predicts that the transaction, after closing in the first half of 2022, will be accretive by about 6% to earnings per share in 2023 assuming a 75% integration by then, and 8% when fully consolidated. integrated by 2024. The bank expects savings of $ 900 million, or about 40% of estimated non-interest expenses, through real estate consolidation, technology and systems conversion, and other back office efficiency gains.
This should help the performance of one of the most efficient banks in the country, with an efficiency ratio (how much a bank spends to generate $ 1 in income) of 58%, among the lowest of the major banks. Meanwhile, the acquisition is also expected to boost the return on tangible common stocks, to 21%, also among the top of the nation’s largest banks. It currently has an operating margin of 42%, which is higher than that of all major banks except JPMorgan Chase.
Earnings growth and efficiency also bode well for the dividend, which US Bancorp just increased to $ 0.46 per share in the third quarter – or $ 1.84 per year. US Bancorp has a dividend yield of 3.2%, which is above the financial industry average of about 2.6% and the S&P 500 average, which is about 1.3%. It also has a low dividend payout ratio equal to just 37.2% of earnings. This acquisition of MUFG Union Bank is expected to strengthen US Bank’s already strong position as the leading super-regional bank.
State Street expands with the acquisition of its rival
On September 7, State Street took a big hit when it bought out the Investor Services business of Brown Brothers Harriman for $ 3.5 billion in cash. This includes its custody, accounting, fund administration, global markets and technology services. As a result, State Street will become the largest global custodian of assets in the world when the transaction closes at the end of 2021. BBH Investor Services had $ 5.4 trillion in assets under custody (AUC) as of June 30, which would add further at State Street $ 42.6. one thousand billion. The combination would make State Street the world’s largest custodian bank, exceeding BNY Mellon, which has approximately $ 45 trillion in AUC.
The deal is expected to generate profits in the first year. Once BBH Investor Services is fully integrated, the company expects a 31% increase in its operating margins. The company said it expects to see spending cuts of $ 260 million
through efficient operational systems, infrastructure and overhead consolidation. The purchase not only gives State Street greater stature and the leading share of the conservation market, but it also expands State Street’s reach into non-U.S. Markets that State Street has targeted for growth, including Japan, Luxembourg, Ireland and Latin America.
In addition to custodial services, State Street also has a strong asset management division as the third largest manager of exchange-traded funds after Black rock and the Avant-garde. There has been speculation that State Street is interested in buying the fourth-largest exchange-traded fund company, Invesco, which could help it gain market share as well. State Street invented ETFs, but has since fallen behind its two biggest rivals. The acquisition of Invesco, which owns some of the most popular ETFs in the market, such as the Invesco Trust QQQ – would be a major boon.
State Street’s stock price is up about 15% year-to-date. It did relatively well in 2021 with commission income up 6%, while net profit rose 10% in the second quarter compared to the previous year. In addition, AUC grew 27% in the second quarter year-on-year while assets under management jumped 28%.
State Street increased its quarterly dividend by 10% in the third quarter to $ 0.57 per share, or $ 2.28 per year. This corresponds to a dividend yield of 2.8% with a payout ratio of 31%.
Custodian banks hold assets in secure accounts and handle administrative tasks for large institutional clients. Income is generated by fees and is very regular and stable – the type preferred by income seeking investors. Combine that with State Street’s ETF activity, which has huge growth potential over the next decade, and you’ve got a good mix of income.
This agreement to acquire the conservation business of Brown Brothers puts State Street on an even better conservation footing and is expected to lead to increased earnings growth. This is good news for dividend investors.
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