Updated on April 19th, 2019 by Josh Arnold
The four money center banks in the U.S. have received a great deal of attention from investors and the media in the years since the Great Recession. The big banks suffered mightily during the worst economic downturn in decades.
However, those days have long since passed, and the largest banks are generating profits at rates never seen before.
Many big banks have fully recovered and then some, and have returned to paying hefty dividends to shareholders. You can download the full list of all 1,000+ dividend paying financial sector stocks below.
In addition, these once-strong dividend stocks were reduced to smaller payouts for years, but are in the process of restoring those shareholder distributions; some have made better progress than others.
However, the past decade has rejuvenated the group and in this article, we’ll rank them in order of attractiveness on a total return basis, as derived from our Sure Analysis database.
Rankings are compiled based upon the combination of current dividend yield, expected change in valuation as well as forecast earnings-per-share growth to determine which stocks offer the best total return potential for shareholders.
Related: Watch the video below to learn how to calculate expected total return for any stock.
Read on to see which of the four biggest U.S. banks are ranked attractively for dividend growth investors today.
Big U.S. Bank #4: JPMorgan Chase & Company (JPM)
JPMorgan Chase traces its lineage back to 1799, making it one of the oldest surviving banks in the U.S. The company has a strong global reach in consumer and community banking, commercial and investment banking, as well as asset and wealth management.
JPMorgan focuses heavily on consumer lending via its enormous mortgage, auto, and credit card loan operations, but has a vibrant mix of non-lending activities as well.
It is the product of more than 1,200 different entities that have merged in the 220 years since its creation and is the largest bank in the U.S. by market capitalization, with a market capitalization near $370 billion.
JPMorgan is widely considered the benchmark for other money center banks in terms of its revenue diversification, tremendously strong balance sheet and sizable capital returns to shareholders.
That strength and perceived best-of-breed status has led to the stock being more robustly valued than the rest of the group in recent years, meaning it is now slightly less attractive for value investors. Indeed, over just about any time frame one chooses, JPMorgan has been the best-performing mega-bank in the U.S.
However, strong results continue to come in, as evidenced by its recent Q1 report, helping to support this strong performance.
Source: Q1 earnings presentation, page 2
Q1 results were released on 4/12/19 and beat expectations. Revenue totaled $29.1 billion, a new record for the company. JPMorgan has become almost accustomed to setting records in recent years, and continues to do so.
The bank saw strength from all of its reporting segments as its scale and diversification blended for another strong performance. Earnings-per-share were $2.65 in Q1 against $2.37 in the year-ago period, representing growth of 12% year-over-year.
Firm-wide revenue was up 5% as loans rose by the same amount. Noninterest expense was up just 2%, driving margin expansion as JPMorgan worked once again to control cost inflation.
The bank’s efficiency ratio is 55% currently, which is roughly in line with its large banking peers. Book value was up 6% to $71.78 and tangible book value is now $57.62.
Credit quality remains best-in-class as charge-offs were low, the product of prudent lending standards. The balance sheet continues to represent JPMorgan’s :fortress” strategy despite the fact that it returns billions of dollars to shareholders each year.
Its common equity tier 1 capital ratio is 12.1% at the end of Q1 and its supplementary leverage ratio is 6.4%, both of which compare nicely to required minimums and other large banks.
JPMorgan returned $7.4 billion to shareholders in the first quarter alone through $4.7 billion in share repurchases, and the balance in dividends, which is currently set to $3.20 per share annually.
One note of caution is that the years-long interest rate expansion narrative appears to have run its course for now. JPMorgan’s interest rate spread in the past five quarters has hovered around 2.25% as the yield curve has flattened.
This will act as a potential headwind for earnings growth in the coming quarters, and we’ve revised our estimate of earnings-per-share in 2019 accordingly, dropping our estimate to $9.70 from $9.95 previously.
JPMorgan’s earnings outlook isn’t as bright as the other big banks. Its profitability is already excellent, it has a significant amount of leverage to the flattening yield curve via its consumer and commercial lending operations, and its credit card portfolio is huge as well. The credit card portfolio accounts for nearly half of its revenue in the flagship community and consumer banking business.
Credit card losses have moved higher in recent quarters as credit quality has come off of historically unsustainable highs. This has been a problem for all credit card lenders but given JPMorgan’s sheer size in the space, the damage is more acute.
Still, we see JPMorgan producing 5.5% annual earnings-per-share growth in the coming years, with 2019 representing above-trend growth.
These gains will accrue from low single digit revenue growth, continued net interest income growth – mostly from higher loan balances – and a tailwind from the share repurchase program. While we continue to like JPMorgan’s scale and diversification, its exposure to a flattened yield curve and rising credit card losses have us a bit cautious.
JPMorgan’s valuation remains the highest among the four largest banks, although it has come down of late. The stock trades for a price-to-earnings multiple of 11.5 times this year’s earnings, slightly in excess of our fair value estimate of 11 times earnings. The valuation thus has a slight downside risk, but the impact to total returns should be limited to less than 1% annually.
JPMorgan is on track to deliver 7.5% total annual returns thanks to the combination of the 2.8% dividend yield, 0.8% headwind from the valuation, and 5.5% earnings growth. Given this, we’ve moved JPMorgan to a hold rating as it offers the lowest projected total returns of the group.
Big U.S. Bank #3: Wells Fargo & Company (WFC)
Wells Fargo was founded in 1852. Today, it provides banking, investments, mortgages, as well as consumer and commercial financing products through more than 8,000 locations in 42 countries.
Wells Fargo has $2 trillion in assets, and produces nearly $85 billion in annual revenue. Wells Fargo’s market capitalization is $215 billion, which makes it the third-largest bank in the U.S.
Wells Fargo reported Q1 earnings on 4/12/19 and results sent the stock meaningfully lower. Earnings-per-share came in at $1.20 in Q1, which was a dime ahead of expectations. However, many of the bank’s core operating metrics disappointed during the quarter.
Source: Q1 earnings presentation, page 4
Net interest income fell to $12.3 billion from $12.6 billion as two fewer operating days weighed, and from the impact of the flat yield curve. Wells Fargo, and any other bank that borrows short-term money to lend it longer-term, suffers when the yield curve flattens, as it has in the past several quarters.
This is because the rates at which the bank can lend money are closer to the rates it has to pay to borrow the money, compressing margins. To this end, first-quarter net interest margin declined 3bps to 2.91% from the previous quarter’s level of 2.94%.
Wells Fargo’s net interest margin is strong, but it is also more susceptible to the flat yield curve because of its heavier focus on traditional lending, such as mortgages. It also introduces an added headwind, when the bank is already struggling to grow.
Average loans were flat during the quarter but provisions for credit losses increased, creating another headwind to earnings growth. Provisions rose in the first quarter from $654 million in the year-ago period to $845 million this quarter.
To be clear, Wells Fargo’s credit quality is still quite good, but rising provisions create another headwind to earnings growth as provisions directly reduce earnings.
Wells Fargo’s balance sheet remains strong and in line with its large banking peers. Its common equity tier 1 capital ratio is 11.9% despite the billions of dollars it returns to shareholders annually.
Indeed, Wells Fargo bought back almost $4 billion in shares in the first quarter alone. Year-over-year, the bank’s share count declined 7%, providing a powerful tailwind to earnings-per-share growth despite the challenges the bank is having growing earnings on a dollar basis.
Guidance for 2019 is for net interest income to fall 2% to 5%, which was a meaningful reduction from prior guidance of -2% to +2%. We’ve trimmed our earnings-per-share estimate accordingly to $4.80 for 2019, fueled primarily by share repurchases.
Longer-term, we expect average annual earnings-per-share growth of 6%. This should accrue from a small amount of revenue growth, although 2019 appears to be an outlier to the downside on that metric.
At some point, we expect Wells Fargo’s regulator-imposed asset cap to be removed and allow it to return to loan and revenue growth, but that has not yet occurred.
Apart from that, the slope of the yield curve is an issue for Wells Fargo given its exposure to traditional lending activities that rely upon cheap funding to fuel net interest margins.
Because of this, we see actual dollar basis earnings growth potential as limited, but Wells Fargo should continue to buy back a significant portion of the float each year, making up the lion’s share of earnings-per-share gains.
The stock’s valuation has declined significantly of late and today, it trades at just 9.7 times our 2019 earnings estimate. This compares favorably to our long-term fair value estimate of 11 times earnings, implying a ~2.6% tailwind to total annual returns from a rising earnings multiple over the next five years.
Combining this with our forecast of 6% earnings growth and the 3.8% dividend yield, we see total annual returns in excess of 12% in the coming years.
While Wells Fargo certainly has some issues to work out operationally, we see the stock as cheap and with a large yield, which is the highest among the large banks today.
Big U.S. Bank #2: Bank of America (BAC)
Bank of America was founded back in 1904 and since then, has grown into a global banking juggernaut. It has built a strong presence in credit cards, consumer and commercial lending, wealth management, and other financial services. The market capitalization is $287 billion today, making it the second-largest bank in the U.S.
Bank of America reported Q1 earnings on 4/16/19 and results beat expectations. Revenue was flat year-over-year, declining fractionally from $23.1 billion to $23 billion. However, Bank of America saw its 17th consecutive quarter of operating leverage as noninterest expense declined 4% year-over-year.
Bank of America has been on a years-long mission to reduce its operating expenses that were a legacy of the financial crisis, and its progress has been truly outstanding. Its efficiency ratio is down to 57% from 60% a year ago, which is nearing its peer group after years of elevated, unsustainable operating costs.
This helped drive earnings-per-share growth 13% higher year-over-year to $0.70, which was a new record.
Source: Q1 earnings presentation, page 8
Net interest yield expanded 9 basis points to 2.51%, which is a particularly strong result not only against its peers, but also considering the significant flattening of the yield curve that has occurred in the past several quarters.
The consumer banking segment produced terrific results as average loans rose 5% and deposits increased 3%. Commercial loans rose 4% as well, helping to drive net interest yield higher and boost lending margins.
Return on assets produced a 5 basis-point expansion to 1.26% in the first quarter, compared with the same quarter a year ago. The bank continues to return capital to shareholders in the billions of dollars as well, as it gave investors 112% of earnings in the first quarter.
Cash returns were comprised of $1.5 billion in dividends and a staggering $6.3 billion in share repurchases during the quarter. Bank of America’s dividend is $0.60 per share annually today, good for a 2% yield.
Due to the better-than-expected first-quarter report, we have boosted our earnings-per-share outlook to $2.85 for this year. Earnings growth will be primarily due to continuously improving operating leverage and share repurchases.
Bank of America’s earnings outlook is strong as we expect 8% earnings-per-share growth annually going forward. Much of this will come from the buyback but the bank is also growing its loan portfolio in the mid-single digits, and its operating leverage continues to provide the opportunity margin expansion.
Combined, these factors should produce high single digit earnings-per-share growth annually for the foreseeable future and at the current valuation, that makes the stock very attractive.
We forecast Bank of America’s price-to-earnings multiple will rise from the current 10.5 to a more normalized 12 going forward, which is more in line with its large banking peers. That should provide a ~2.7% tailwind to total returns going forward.
We expect Bank of America to return nearly 13% to shareholders annually for the next five years, consisting of the 2.7% valuation tailwind, 2% dividend yield, and 8% annual earnings-per-share growth.
Bank of America’s shares have underperformed of late, and we believe this has created an opportunity for those that want to own the stock.
Big U.S. Bank #1: Citigroup (C)
Citigroup has been in the banking business since 1812, when it was known as the City Bank of New York. This humble beginning eventually gave way to a global powerhouse with interests in credit cards, commercial banking, trading, and a variety of other related activities.
It has thousands of branches all over the world and a $161 billion market capitalization today, making it the smallest of the big banks in this article.
Citigroup certainly had the furthest to come in terms of recovering from the 2008 financial crisis. The stock famously fell below $1 briefly during the worst of the recession, but the eventual bailout and years of economic growth have paid off for the company.
Citigroup is in much better shape than it has been in recent years. Indeed, while Citigroup is far from perfect, its recently reported Q1 results showed it continues to make progress towards its goals of a strong balance sheet and a balanced outlook for growth and risk.
Citigroup’s first-quarter report was somewhat mixed, but still met expectations. Revenue was slightly lower year-over-year thanks to the continued wind down of Citi’s financial crisis era toxic asset base, as well as lower equity markets revenue.
The Global Consumer Banking segment posted flat revenue year-over-year while the Institutional Clients Group posted a 2% decline in the top line.
Source: Q1 earnings presentation, page 3
Provisions for credit losses came in at $1.98 billion in the first quarter, up more than 6% from the year-ago period. This is certainly a concern for Citi’s earnings growth for this year, but is in line with what peers are experiencing.
Credit quality tends to deteriorate towards the end of economic growth cycles, but rising provisions also reflect loan growth as new loans must have provisions written against them.
Citigroup’s efficiency ratio was 57% in the first quarter, down slightly from 57.9% in the comparable period last year. Citigroup, like Bank of America, has spent years trying to remove excess costs from its model, and those efforts are clearly paying off. Due in part to this, Citigroup’s margins continue to improve.
Earnings-per-share rose 11% in the first quarter, but on a dollar basis, that number was just +2%. The share count was 9% lower this quarter than last year’s first quarter, a very impressive feat as Citigroup’s buyback program has worked extremely well.
Despite billions of dollars in capital returns, Citigroup’s balance sheet remains in great shape. Its common equity tier 1 ratio is 11.9% and its supplementary leverage ratio is 6.4%. Both of these compare nicely to peers and required minimums, so certainly no concern from a capital buffer perspective.
Tangible book value was up 7% year-over-year to $65.55 per share, which is only slightly under the current share price near $70. Our earnings-per-share estimate for this year is $7.50 after a largely in-line first-quarter report.
Looking forward, we see 8% annual earnings-per-share growth with the bulk of that accruing from the buyback. Higher revenue should help some as well as Citi continues to gather cheap deposits and lend them profitably, but higher provisions for credit losses continue to be an industry-wide concern.
Margin expansion in recent years should slow down going forward, simply because the bank has already made so much progress, but a continued focus on expense controls should drive a small earnings growth tailwind. We see Citigroup’s growth outlook as bright, but certainly driven mostly by share repurchases.
The dividend was slashed to essentially nothing during the financial crisis but is back to $1.80 per share today. We see continued strong dividend growth for Citigroup moving forward, adding another attractive element to the stock.
Its current yield is 2.6%, so it can already be considered an income stock. However, we see the payout rising significantly in the coming years, adding a dividend growth element to the stock.
Citigroup’s current price-to-earnings multiple of 9 is well under its historical average of 10.5 and as a result, we see the stock as attractively priced. Citigroup’s average earnings multiple is lower than that of its peers as it has been the one in the group with the most improvements to make.
It has done so over the years but still stands with the most to gain going forward and as a result, it is unlikely to trade on par with the others. However, given how cheap the stock is today, even if it doesn’t trade on par with its peers, there is a ~3% potential tailwind to total returns annually from a rising valuation.
We still see total returns of 13%+ annually going forward, consisting of the current 2.6% yield, 8% earnings-per-share growth, as well as the tailwind from the stock being undervalued today.
Citigroup looks attractive for those seeking growth as well as rising dividends, and the recent bout of weakness in the stock has put it in value territory as well. We see Citi as the most attractive of the largest U.S. banks today, and rate the stock a buy as a result.