Published on January 15th, 2015
JP Morgan Chase (JPM) is the 2nd largest publicly traded bank in the US, and 16th largest publicly traded corporation overall. Both JP Morgan Chase and Wells Fargo released their earnings yesterday. JP Morgan Chase was down over 4% at the time of this writing, while Wells Fargo was down about 1%. For more detailed analysis on Wells Fargo, see this article.
JP Morgan Chase Overview
As the 16th largest publicly traded corporation in US markets, JP Morgan Chase is a truly massive enterprise worth of $220 billion. JP Morgan Chase divides its operations into 5 segments. Each segment is listed below along with the percentage of total net income contributed to JP Morgan Chase in full fiscal 2014:
- Consumer & Community Banking: 42% of total income
- Corporate & Investment Banking: 32% of total income
- Commercial Banking: 12% of total income
- Asset Management: 10% of total income
- Corporate/Private Equity: 4% of total income
The Consumer & Community Banking segment is the company’s largest, followed by the Corporate & Investment Banking segment. Together, these two segments account for nearly three quarters of the company’s net income.
JP Morgan Chase’s competitive advantage in consumer and community banking come from its network of 5,600+ Chase Bank locations. The company’s sprawling network of community banks makes it convenient for a large share of the US market to bank at Chase. In addition, the company has been focusing on customer service. . JP Morgan Chase has ranked #1 in customer satisfaction in the large US bank category for 3 consecutive years according to the American Customer Satisfaction Index. The company’s convenient locations and quality customer service make it an easy banking choice for many customers.
JP Morgan Chase’s other large profit center is its Corporate & Investment Banking segment. The company has a competitive advantage in investment banking thanks to its long corporate history and excellent connections and relationships with the business community in general. JP Morgan Chase is currently the leader in global investment banking fees, with an 8.1% market share.
JP Morgan Chase’s competitive advantages do little to protect it from recessions. The company saw earnings per share dip from a high of $4.38 in 2007 down to $0.84 in 2008. The company did not recover to new earnings per share highs until 2011. JP Morgan Chase had to cut its dividend payments from $1.52 per share in 2008 down to just $0.20 per share in 2009. Investors who need stable current income cannot rely on JP Morgan Chase’s dividend payments based on its performance over the Great Recession of 2007 to 2009.
Ranking Using The 8 Rules of Dividend Investing
The following sections will compare JP Morgan Chase to other business with a long history of dividend payments using the 5 buy rules from The 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing are used to build a portfolio of high quality businesses with a long history of rewarding shareholders with rising dividends. Each of the rules has a short ‘why it matters’ section detailing why the specific rule is important in indentifying and ranking high quality businesses suitable for long-term investors.
Rule 1: 25+ Year Dividend History
JP Morgan Chase last reduced its dividend payments in 2009 during the Great Recession. As a result, the company does not pass the first rule of dividend investing; a stock must have 25 or more years of dividend payments without a reduction. With that said, JP Morgan Chase will still be analyzed using the 5 buy rules from The 8 Rules of Dividend Investing to show where the stock would rank if it did pass the first rule.
Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet
Rule 2: Dividend Yield
JP Morgan Chase has a dividend yield of over 2.8%. This is the 54th highest dividend yield out of the 145 businesses with 25 or more years of dividend payments without a reduction in the Sure Dividend database. JP Morgan Chase’s above average dividend yield should appeal to income oriented investors.
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns
Rule 3: Payout Ratio
JP Morgan Chase has a payout ratio of about 30%, which is the 25th lowest out of the 145 stocks in the Sure Dividend database. JP Morgan Chase’s low payout ratio gives it plenty of room to grow dividend payments faster than overall company growth. In addition, the company’s low payout ratio insulates the dividend payment from temporary earnings weakness.
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3
Rule 4: Long-Term Growth Rate
JP Morgan Chase has only managed to grow its dividends per share at an anemic 1.7% a year over the last decade. Much of this is due to the company’s weakness over the Great Recession, when the dividend was cut from $1.52 to $0.20. JP Morgan Chase’s growth rate is only the 121st highest out of 145 businesses with 25 or more years of dividend payments without a reduction.
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4
Rule 5: Long-Term Volatility
JP Morgan Chase has a 10 year stock price standard deviation of 43.6%. This is the 140th lowest out of 145. JP Morgan Chase’s stock is not for the faint of heart. The company’s high stock price standard deviation indicates large fluctuations in operating results.
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race
JP Morgan Chase does not qualify for inclusion in the Sure Dividend database as it does not have a long enough time period of dividend payments without a reduction. Even if the company did qualify, it would not rank highly due to its sluggish growth rate and extremely high stock price volatility. For more bank analysis, see Sure Dividend’s analysis of Cullen/Frost Bankers, or this analysis of Wells Fargo by The Dividend Guy.