Stars Aligning for JPMorgan?

Jamie Dimon doing his best Warren Buffett impression

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As Wells Fargo (WFC, Financial) continues to pick up the pieces after the debacle, JPMorgan’s (JPM, Financial) Jamie Dimon was recently putting on his best Warren Buffett (Trades, Portfolio) impersonation at the Economic Club for a possible open position on the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) portfolio. Yes, this interview and Buffett’s subsequent praise has been covered elsewhere, but companies aligning with Buffett’s operating philosophies have at times done so for the very reason of trying to get a spot on the team.

For a comparison, let's take a look at the play IBM (IBM, Financial) made for Buffett before his acquisition. On average, IBM seeks to return $50 billion through share repurchases to investors per annum. The primary uses of cash on the 2015 roadmap were as follows:

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Anybody who follows the Berkshire letters knows a couple of things; Buffett is leery of tech but absolutely adores buybacks. The buyback plan tipped the scales for Buffett in his first tech purchase.

Buybacks to Buffett are possibly the most appealing thing of all on a company’s balance sheet, as he sees them as a tax-free return of capital to investors. The Berkshire model is based on this notion after all; no dividends paid and all income gets reinvested into both public and private holdings.

Here is a quote from Buffett on the power of buybacks from a 2012 annual letter:

“If IBM’s stock price averages, say, $200 during the [next five years],the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%. If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the disappointing scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1.5 billion more than if the high-price repurchase scenario had taken place.

"The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.”

In the same letter, Buffett also praised Dimon for the same philosophy:

“The first law of capital allocation — whether the money is slated for acquisitions or share repurchases — is that what is smart at one price is dumb at another. (One CEO who always stresses the price/value factor in repurchase decisions is Jamie Dimon at JPMorgan; I recommend that you read his annual letter.)”

A comparison of Wells Fargo and JPMorgan treasury stock (buybacks) FY 2013-2015 :

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As a percentage of trailing increase year over year, Wells Fargo is winning, but JPMorgan spent more overall in share repurchases from 2013-2015. With the two yields being close at 2.8 % for JPMorgan and 3.37% for Wells Fargo, the return of capital to investors for JPMorgan is beginning to look more appealing as JPMorgan is only trading at 1.09x book versus Wells Fargo at 1.27x. Therefore , those repurchases equate to a larger purchase of actual assets when JPMorgan makes that repurchase versus Wells Fargo.

Below is the recent interview with Dimon at the Economic Club:

Dimon on the state of the economy since the great recession:

“Fifteen million more people are working.”

“Household formation went from a million and a half, down to 500,000, and now it's back to 2 million.”

“Homes are in short supply and in most markets house prices are back to where they once were.”

“We add 3 million Americans a year; since the great recession we’ve added 15 million people.”

“People are spending their money, and companies are flush with cash.”

On America’s international position:

“America has the best hand ever dealt of any country on this planet today.”

“We have peaceful, wonderful neighbors in Canada and Mexico.”

“We have all the food, water and energy we will ever need.”

“The Chinese would love to have our economy.”

Buffett on the economy, 2015-2016:

"It's an election year, and candidates can't stop speaking about our country's problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do."

"That view is dead wrong: The babies being born in America today are the luckiest crop in history."

"America's golden goose of commerce and innovation will continue to lay more and larger eggs. America's Social Security promises will be honored and perhaps made more generous. And, yes, America's kids will live far better than their parents did."

More importantly than the buyback philosophies that Buffett, Dimon and IBM collectively share, Buffett is first and foremost a jingoist American who believes that the U.S. will continue to prosper better than any of its rivals over long stretches of time. He emphasizes that being an American is akin to winning the genetic lottery and that Americans today, for all their complaints, live better than anyone in American history.

Dimon is aligning both his U.S. views and share buyback philosophies with Buffett in conjunction with putting Todd Combs on the JPM board of directors. If Dimon is trying out for the Berkshire team, he’s running a 4.40 40-yard dash!

Disclosure: The author is long JPMorgan, Wells Fargo and Berkshire Hathaway. The author holds no positions in IBM.

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