TipRanks Smart Dividend Newsletter – Edition #25
Hello and welcome to the 25th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is the world’s largest and best-run bank. But first, let us present a brief investment thesis, supporting our recommendation.
Investment Thesis: Centered on the Money
The past two years have been difficult for U.S. banks, with the KBW Nasdaq Bank Index, comprised of the nation’s largest financial institutions, falling almost 50% from its all-time high in January 2022. For one, the Federal Reserve’s aggressive monetary tightening led to a worsening economic outlook and weighed on investors’ sentiment towards everything unrelated to the technology part of the market. While rising interest rates benefit banks’ profit margins, they can curb demand for loans, and weaker business activity weighs on both demand and supply of loans. In addition, the financial industry suffered a significant blow in the wake of the regional banking crisis back in March, which almost shattered what was left of investor sentiment toward banks.
However, as Warren Buffett said, “It’s only when the tide goes out that you learn who has been swimming naked,” a phrase that also works the other way around: when the tide goes out, you can learn who has been swimming in full diving gear. Now, when the feeling of impending economic catastrophe has all but disappeared and the worst economic scenario (barring any unexpected disasters) is that of a mild recession, large, stable, and profitable money centers begin to appeal to investors again. Their latest earnings reports have confirmed that the panic about the fate of the U.S. financial system has been greatly exaggerated.
While the economic outlook remains uncertain, and there could be some negative surprises stemming from macro developments, political instability, or geopolitical events, affecting investor flows, the largest U.S. banks remain a beacon of stability, particularly in the sense of their shareholder compensation. While their shares have not regained their posture yet, meaning that valuations are modest, their improving short-term outlook is expected to continue supporting share prices and propping up the price multiples. Meanwhile, their sustained long-term potential and generous dividends and buybacks make them an attractive choice for those seeking steady income.
Quality Dividend Stock: This Week’s Top Pick
JPMorgan Chase & Co. (JPM) is the world’s most systemically important banking institution, as well as the largest bank in the world (by market capitalization). It is also the oldest bank running on the globe, tracing its roots back to the 18th century.
The firm is built on the foundation of more than 1,200 predecessor institutions that have come together through the years to form today’s company. The list of predecessor companies, running from 1799, includes The Bank of The Manhattan Company, The Chemical Bank, The Bank of Commerce, The First National Bank of Chicago, Drexel, Morgan & Co., Chase National Bank, and many more.
JPM’s “founding father,” John Pierpont Morgan, played a key part in the stabilization of the U.S. financial system at the time of the Panic of 1907, basically helping save it from collapse. His initiative to organize leading banks to prop up the banking system eventually led to the creation of the Federal Reserve System in 1913.
J.P. Morgan and his firm dominated corporate finance on Wall Street and were the driving force behind the wave of industrial consolidation in the United States spanning the late 19th and early 20th centuries. J. P. Morgan & Co. funded many prominent public and private endeavors, such as the organization of United States Steel, the world’s first billion-dollar corporation, the building of the Brooklyn Bridge, the Panama Canal, the Houston Ship Channel, and many more.
JMP’s predecessor companies are behind many of the developments and innovations in the U.S. and global financial landscape. Thus, Guaranty Trust Company invented American Depositary Receipts (ADRs) in 1927; National Bank of Detroit opened a first drive-in banking window in 1941; Chase Manhattan introduced the first credit card in 1958 and installed the first automated check-processing center in 1961, using one of the first IBM computers; Chemical Bank installed the nation’s first cash dispensing machine, the precursor to the ATM, in 1969, and launched the world’s first online banking service in 1995. When the U.S. Federal Reserve relaxed the Glass-Steagall banking laws separating commercial and investment bank activities, in 1989, J.P. Morgan & Co. became the first U.S. bank holding company to provide clients with a full range of securities services since the 1930s.
J.P. Morgan & Co. became a publicly traded company in 1940. In 2000, J.P. Morgan merged with Chase Manhattan, becoming “J.P. Morgan Chase & Co.” In 2004, JPM merged with Bank One; in 2008, it helped stabilize markets reeling from the global financial crisis (GFC), by acquiring the failing investment bank Bear Stearns and commercial bank Washington Mutual. JPM also played a stabilizing role in the regional banking crisis of 2023, when it bought most assets of First Republic Bank after the regional lender collapsed.
Today, J.P. Morgan Chase & Co. commands a market capitalization of $425 billion and a workforce of ~310,000 in over 100 countries. With almost $4 trillion in assets globally and $180 billion in annual revenue, it is by far the biggest bank in the United States. JPM ranks 23rd in the Fortune 500 list of largest U.S. companies by revenue, and 53rd in the Fortune Global 500 list of largest companies in the world.
J.P. Morgan Chase provides corporate and investment banking, asset management, private banking, and private wealth management through its J.P. Morgan line, while the Chase line is responsible for credit card services and other consumer banking services. JPM is the leading corporate finance & investment banking institution in the world, with ~10% global market share. Its $4 trillion in assets under management (AUM) makes it one of the largest wealth managers in the U.S. and globally. Consistently ranked #1 in market revenue since 2011, JMP holds a leading position in revenues received from equity, fixed income, currencies, and commodities trading.
In the U.S., JPM commands the largest share of deposits and credit card spending, as well as the largest number of consumer banking branches. In total, the banking behemoth holds ~25% market share in the U.S. banking industry, serving ~80 million U.S. consumers and ~6 million small businesses; it holds a #1 position in the U.S. in consumer checking accounts, credit card issuance, retail deposit share, and SME accounts, and #2 position in mortgage service.
JPM’s wide economic moat, based on its diverse portfolio of financial services, as well as the company’s gigantic scale, give it a massive competitive advantage over other large U.S. banks, as well as over foreign competitors. It has shown the best-in-class financial performance since 2008.
As for its financial health, all of the metrics relevant to the financial institutions flash bright green. Thus, it has a very low level of bad loans, while its bad-loan allowance is triple the minimum sufficiency level for systemically important banks. Its loans-to-deposits and loans-to-assets ratios are low; most of its liabilities are low risk; and its assets-to-equity ratio is moderate.
J.P. Morgan Chase’s debt is very highly rated, standing among the highest-rated banks in the world: “A+” at Standard & Poor’s, “Aa2” at Moody’s, and “AA-” at Fitch. Particularly, Fitch said, “The rating affirmation reflects the strength and stability of JPM’s financial performance through multiple cycles, its proven ability to build capital and liquidity to meet more strenuous regulatory requirements, and the diversity of its overall business model. All of this is underpinned by the firm’s industry-leading franchises across multiple consumer and wholesale businesses, which drive pricing power and allow it to adequately invest in risk management infrastructure and customer interface technology which further allows it to defend and grow its market share.”
In October, J.P. Morgan Chase reported its Q3 2023 financial results. Revenue and EPS exceeded analysts’ expectations, as was the case in most quarters for which these estimates were available. Particularly impressive was the EPS performance, with earnings-per-share registering medium to high double-digit annual growth for the third consecutive quarter. In the past three years, JPM’s revenues rose at a CAGR of 13.5%, and EPS grew at a CAGR of 30% – very impressive for one of the most regulated institutions on the globe.
On another positive note, investors were impressed by JPM’s performance in 2023, particularly considering the ongoing pessimism surrounding the macroeconomic conditions and outlook. J.P. Morgan’s results continued to be much stronger than those of its peer banking giants Bank of America (BAC), Wells Fargo (WFC), Morgan Stanley (MS), and Citigroup (C), strengthening the commonly held perception of JPM as the best-managed bank in the world. Much of the bank’s success can be attributed to its CEO Jamie Dimon, labeled as “the world’s top banker,” who led JPM to the top of the world’s rankings.
These robust results, along with JPM’s and Jamie Dimon’s stellar performance resume, have propelled the bank’s stock up this year, while the rest of the pack struggled. While its peers’ stocks have declined by the double digits in the past 12 months, JPM is up 9.5% for the period. JPM’s shares have gained ~45% in the past three years, putting it in mid-range among its peers.
Furthermore, TipRanks-scored top Wall Street analysts see an average upside of 19.3% for the stock in the next 12 months. JPM carries a TipRanks Smart Score rating of 9/10 “Outperform” with a “Moderate Buy” recommendation:
The main reason for JPM’s rating being lower than a “Perfect 10” is Jamie Dimon’s announcement in October about his plans to sell one million shares of the bank’s stock, starting in 2024. The shares to be sold currently amount to ~$140 million and represent about 12% of the bank’s shares he owns. The announcement spooked investors because Mr. Dimon has never sold JPM’s shares before – on the contrary, he bought much of his holdings with his personal capital. Since Dimon became JPM’s head, its share price has surged more than 300%, far outpacing the S&P 500 (SPX).
Dimon said he is selling the stock for financial diversification and tax-planning purposes – a common reason for executives to sell their companies’ shares. It’s important to recognize, though, that for Dimon, the sale will represent a fraction of JPM’s stock he accumulated, currently valued at ~$1.2 billion. After the sale, his holdings will still dwarf those of the executives at J.P. Morgan Chase’s peers, as the second-largest stock-hoarder, Morgan Stanley’s CEO, holds about $80 million of MS’ shares. CEOs and other top executives from JPM’s rival firms have also cashed in far larger proportions of their companies’ holdings over the past decade than what was slated in Dimon’s announcement.
The market’s negative reaction to the announced sale has had its merits, as it kept a lid on the valuation’s increase. JPM is now trading at a TTM P/E of 8.7 and a Forward P/E of 8.8, representing ~5.5% discount to the Financial sector’s averages. When compared to its peers in the industry, J.P. Morgan comes in the middle of the price range; JPM is currently trading below fair value. Given its enormous size, best-in-breed management, excellent financial health, robust earnings growth, and great long-term prospects, as well as strong alignment with shareholders, JPM seems to be strongly undervalued. We believe that it is prudent to gain long-term exposure to the best bank in the world while that is the case.
While global and U.S. financial institutions could face pressures due to a potential recession, JPM remains the best-equipped bank in the U.S., and probably in the world, to overcome any macroeconomic challenges. The bank’s strength, especially important in the downward parts of the economic cycle, is reflected in its capital allocation strategy, among others. Thus, JPM has consistently shown that increasing dividend payouts remains one of its top priorities, supported by its strong financial performance and earnings growth.
J.P. Morgan Chase has a long history of paying dividends and has consistently increased its dividend payout for 15 consecutive years. In the past decade, JPM’s annual dividend-per-share growth averaged 13.7%. The latest increase was in October when the payout rose by 5%. JPM’s current dividend yield of 2.81% is higher than the Financial sector’s average of 2.1%. Meanwhile, its low payout ratio of 24.2% reflects the fact that JPM retains more than sufficient capital for business growth and has a lot of room for further dividend increases.
In addition to dividends, JPM compensates its shareholders through buybacks. After successfully passing the Federal Reserve’s “Stress Test” in June this year, the bank announced that it would resume share repurchases, which were temporarily suspended in mid-2022 amid views of growing risks of a recession and a need to build up capital to prepare for macroeconomic downturn. However, after the tests, and on the back of great financial performance this year, the repurchases were resumed, with the bank’s CEO Jamie Dimon penciling in about $12 billion of buybacks in 2023. This amount, while large enough, is much lower than 2021’s buybacks of over $18 billion, which points to a still-cautious stance toward capital retention in times of economic uncertainty. In Q3 2023, the bank repurchased its common stock for the net amount of $2 billion.
To conclude, we believe that J.P. Morgan Chase’s impressive dividend growth and history of consistent payout increases, along with its solid profitability and robust growth metrics, supporting shareholder compensation increases in the years to come, is an exceptionally attractive choice for dividend investors.
Disclaimer
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