I’ve been having this odd penitential feeling of late, and I just watched Jim Cramer take shots at a pretty good percentage of the financials, and thus I feel it’s necessary to do something similar - call it the hierarchy of financial stocks worth buying. There are three of them, two which I classify as “good” and one “great.” All three look moderately attractive, but I wouldn’t start thinking about making a large capital commitment unless they lost another 15% or so - but since I can see two of the three losing about twice that, best to be prepared. I’ll cover all three this week.

The Goods:
US Bancorp (USB)
Wells Fargo (WFC)

The Great:
American Express (AXP) - here.

USB is a great financial play because it derives half its revenues from non-interest-related sources like asset management, and has largely avoided the structured finance and subprime lending traps that have hurt so many other institutions. USB is like the Goldman Sachs (GS) of banking; when everyone else struggles they begin to look so much better and you realize they aren’t dependent on a favorable market. Management has targeted and delivered on the 20%+ return on equity goal, and the obsession with efficient performance really separates USB from the rest of the pack.
Further, the company grew non-interest revenues at a 12% clip in the fourth quarter. A financial institution that did something right in the fourth quarter is worth paying up for in this environment, and USB raised their dividend. It almost looks like complete hubris when Citigroup (C) cuts, Washington Mutual (WM) stock is falling so fast the yield goes up even as they cut their dividend, and USB raises 6%. Then again, when your non-performing loans only increase 4 basis points year-over-year (9.76%), your net result is a bank that is still well-capitalized and healthy.

Looking at USB’s last quarter, there are two items listed as non-recurring of note. The first is a $107 million pre-tax/$0.04 EPS charge related to some bad commercial paper; I wouldn’t be so fast to exclude this completely because I believe you could see these for a few more quarters. The other charge was $215 million pre-tax/$0.09 EPS relating to a Visa (V) settlement - this is a legitimate non-recurring charge that I’ll discuss more when talking about American Express.

USB is yielding 5.6% right now, and between that large (and safe) yield, and the generally strong asset quality thanks to conservative lending standards, I don’t see the stock presenting a huge downside risk - although I’d really become interested if this came down 10-15% and made a new 52-week low, because then 2x book value and a 6% yield comes into play and that would make for an all-around attractive purchase point.

On the following 2-year stock chart, note the volatility the stock has seen in the last few months.
[You may need to scroll down]

Finally, this is from Richard Davis, USB’s CEO, talking about his bank’s mortgage lending on the Q4 conference call. From anyone else, this would terrify me:
“I’m happy to report, we didn’t have to change any of our protocols, our products, our broker stream, we were doing exactly the business a year ago that we’re doing today.”

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If you have a suggestion as a fourth best financial stock, drop a comment below.