Here's Today's Best Big Bank Stock

By Markets Fool.com

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If you had to buy a big bank stock today based solely on its current price, valuation multiple, and profitability, which one would you pick?

  • If you're a value investor, chances are you'd say Bank of America or Citigroup, both of which trade for double-digit discounts to book value.
  • If you take investing cues from Warren Buffett -- namely, hisadvice that it's "far better to buy a wonderful company at a fair price than a fair company at a wonderful price" -- then you'd likely say U.S. Bancorp or Wells Fargo, both of which, not coincidentally, are owned in part by Buffett's Berkshire Hathaway.
  • And if you're a growth investor, then you'd probably go with Regions Financial or Fifth Third Bancorp, the smallest of the nation's 10 biggest banks.

But what if you wanted to know which of these stocks, given the bank's current valuation and profitability, would generate the highest shareholder return over, say, 25 years? Where would one even begin this analysis?

Right here, that's where.

And you can end it here as well, because I sharpened my pencil and calculated how the nation's largest traditional banks (e.g., not investment banks like Goldman SachsandMorgan Stanley or custodial banks like Bank of New York MellonandState Street) stack up in terms of projected shareholder returns given what we know today.

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Here's what I came up with:

As you can see, assuming nothing changes at any of these banks, then the best big bank stock to buy today is U.S. Bancorp. While shares of the Minneapolis-based regional bank trade for 1.96 times book value, the highest multiple of the bunch by a comfortable margin, it more than makes up for that with profitability. Over the last 12 months, it generated a 15.35% return on equity.

Also projected to produce double-digit growth rates are Fifth Third Bancorp (one of my colleague Anand Chokkavelu's favorite bank stocks), Wells Fargo, and JPMorgan Chase -- most of which, not surprisingly, have produced some of the best shareholder returns in the bank industry over the past few decades.

Now, I know what you're probably thinking: What good does it do to make projections based on these banks' current valuations and fundamental performances? Wouldn't it be better to make an educated guess about the likely future direction of these metrics for each of these banks and then use those estimates as a starting point?

I understand that line of thought, but I believe it's misguided. Making predictions about the future is hard. But although we have no idea what will happen in, say, five years, we do know that the industry leaders today have, at the very least, a legitimate chance of being the industry leaders tomorrow.

And given that the future is impossible to predict, it follows that the best projections about it are based on the latest data at our disposal -- which is what I've done here. Are my projections perfect? No. In fact, I'm certain that all of them will diverge from reality. But projections like these are nevertheless the best one can hope for until we crack the code on time travel.

It's also worth remembering that while U.S. Bancorp, Fifth Third Bancorp, Wells Fargo, and JPMorgan Chase all perform well because of their current high returns on equity, they also trade at higher valuation multiples than the banks on the other end of the spectrum. For instance, measured by book value per share, investors have to pay nearly three times as much for a share of U.S. Bancorp as they would have to pay for a share of Bank of America, which trades for a mere 0.73 times book value.

Finally, it's no coincidence that most of the banks at the top of the list have long histories of disciplined expense and risk management -- the two most important traits of highly profitable banks -- whereas those at the bottom do not. One of the principal places this disparity shows up is in a bank's shareholder return. Thus, if anything, most knowledgeable bank stock investors probably aren't that surprised by these projections anyhow.

The article Here's Today's Best Big Bank Stock originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc, Fifth Third Bancorp, JPMorgan Chase, PNC Financial Services, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.