Tags: jpmorgan | bank | stock | growth | dividends

JPMorgan: Top-Tier Bank Stock for Growth, Dividends

JPMorgan: Top-Tier Bank Stock for Growth, Dividends
(Piotr Swat/Dreamstime)

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Tuesday, 20 August 2019 12:15 PM Current | Bio | Archive

Most investors want to buy stocks that will provide compelling returns over the long term.

This is especially true of dividend growth investors. These investors often pick stocks based on a company’s ability to continually grow profits steadily, as this helps lead to increased dividends.

Banking giant JPMorgan Chase (JPM) is generating strong growth and rewards shareholders with a hefty dividend. As a result, we believe JPMorgan stock offers attractive return potential over the next five years.

Company Background & Recent Financial Results

Founded in the late 1790s, JPMorgan was one of the country’s first commercial banks. Since then, the company has merged with or acquired more than 1,200 different institutions in order to create the global banking giant that it is today. JPMorgan’s business segments include consumer banking, commercial banking, home lending, credit cards, asset management and investment banking. JPMorgan has a market capitalization of $347 billion and generates $114 billion in annual revenues.

JPMorgan reported second quarter financial results on 7/16/2019. The company earned $2.82 per share, $0.33 above estimates and improving 23% from the previous year. Included in EPS results was a $0.23 benefit due to an income tax resolution benefit. Excluding this, EPS was still up 13%. Revenue grew 3.9% to $28.8 billion, beating estimates by $30.7 million.

The company saw improvements in a wide variety of its businesses. Net interest income was up 7% due to balance sheet growth and higher year-over-year lending rates while noninterest revenue grew 2%. Loans for the entire company improved 2%. These gains were partially offset by lower investment banking fees and market revenue.

JPMorgan has one of the premier balance sheets in the financial sector. The company’s loss provisions of $1.1 billion were a 5% improvement from the second quarter of 2018. The bank’s supplementary leverage ratio of 6.4% and common equity tier 1 ratio of 12.2% were both above regulatory requirements.

Following second quarter results, we estimate that JPMorgan will earn $10 per share in 2019. We expect that the company can achieve EPS growth of 5.5% annually through 2024. A combination of improving revenue and share repurchases (JPMorgan has reduced shares outstanding by more than 15% since 2009) will be the primary drivers of EPS growth over the next five years.

Dividends, Valuation and Expected Returns

JPMorgan, along with most major U.S. financial institutions, was forced to cut its dividend during the last recession. The company was well-positioned enough to endure the recession and maintain its dividend, but regulators preferred that the bank build its capital.

JPMorgan increased its dividend by 12.5% for the payment made on 10/31/2019. This gives the bank nine consecutive years of dividend growth. The dividend is now more than twice what it was prior to the dividend cut in 2009.

The bank’s dividend also appears very safe. Based off of the annualized dividend of $3.60 and our EPS estimates of $10 for 2019, the current payout ratio is just 36%. This is slightly above the stock’s five-year average payout ratio of 33%. Shares offer a current yield of 3.3%, above the average yield 1.9% for the S&P 500.

JPMorgan closed the 8/19/2019 trading session at $108.69. Using our estimates for EPS for the year, the stock has a P/E ratio of 10.9. The stock has traded with an average P/E ratio of 11 over the last 10 years. If the stock were to reach this level by 2024, then valuation would add 0.2% to total annual returns over this period of time.

Total annual returns would consist of the following:

  • 5.5% EPS growth
  • 3.3% dividend yield
  • 0.2% valuation expansion

We forecast that JPMorgan can offer a total annual return of 9% through 2024.

Final Thoughts

Dividend growth investors might be tempted to avoid JPMorgan stock, given its dividend cut during the Great Recession, but we feel that they would be missing an opportunity to add an attractive stock to their portfolio.

The dividend is already well above where it was prior to the cut. In addition, the company has a very strong balance sheet, trades with a very low valuation and offers a high yield. Investors looking for a stock from the financial sector could generate strong returns with JPMorgan.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Most investors want to buy stocks that will provide compelling returns over the long term.
jpmorgan, bank, stock, growth, dividends
722
2019-15-20
Tuesday, 20 August 2019 12:15 PM
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