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Shares of financial giant JPMorgan Chase & Co. (JPM, Financial) have returned nearly 35% over the last year, easily topping the 26% gain for the S&P 500. Of the major banks, the company has outperformed all of its peers during this period of time. Going back further, JPMorgan has returned more than 141% over the last five years, once again making the stock the best performer among its peers. Shares of the company have also more than doubled the gains seen by the S&P 500 during this period of time. Investors holding JPMorgan for growth have had little to complain about during this period of time.
Income investors have also done well with JPMorgan. While the increase in share price has reduced the stock’s yield, shares still offer a yield that is higher than the average in the market. Just as important, the company has raised its dividend by more than 10% annually over the last nine years, and the dividend is well covered by earnings.
JPMorgan recently reported earnings results that reaffirmed my belief that the company is the best name to own in the large-cap banking industry for both growth and income.
Company background and recent results
With a market capitalization approaching $430 billion, JPMorgan is not only one of the largest financial services companies, it is also among the largest companies in the world. The company consists of four divisions: Consumer & Community Banking, Corporate & Investment Banking, Commercial Banking and Asset & Wealth Management. JPMorgan has almost 5,000 branches and operates in more than 60 countries.
JPMorgan reported fourth quarter and full year 2019 earnings results on Jan. 14. Analysts had expected revenue of $27.7 billion and EPS of $2.36 for the quarter and JPMorgan easily surpassed both estimates. The company generated revenue of $28.3 billion, which was $640 million above expectations and an 8.5% increase from the same period of 2018. EPS totaled $2.57 for the quarter, topping the average estimate by $0.21. This was a 30% increase from the previous year. Net income was $8.5 billion for the quarter. The company set new records for revenue, net income and EPS.
For the year, JPMorgan’s revenue grew 6% to $118.7 billion and EPS improved 21% to $10.72. Net income reached $36.4 billion in 2019. Again, all results were company records.
JPMorgan is one of the more consistent companies out there. The company has seen an increase in year-over-year revenue every quarter since the third quarter of 2015. EPS has managed to beat estimates in all but three quarters since the beginning of 2015.
Despite three interest rate cuts from the Federal Reserve in 2019, fourth quarter net interest income of $14.17 billion was less than half of a percent lower compared to the third quarter of the year and down just 1.8% from the fourth quarter of 2018.
Elsewhere, JPMorgan mostly saw growth. Consumer & Community Banking revenue improved 3% year-over-year in the fourth quarter as a 9% increase in Card, Merchant Services & Auto more than offset a 5% decline in Home Lending. Loan deposits grew 7%, helping to offset deposit margin compression.
Revenues for Corporate & Investment Banking improved 31%, primarily due to a 56% increase in trading fees. Fixed income was up 86% while equity trading improved 15%. Investment banking fees hit an all-time record for the year as JPMorgan retained its global leadership position in this area.
Asset & Wealth Management revenues were up 8% from the previous year due to gains made on investment valuations, average market levels and growth in deposits and loans. JPMorgan had net inflows of $14 billion.
Commercial Banking declined 3% due to lower deposit net interest income.
JPMorgan produced yet another quarter where it showed strong results in nearly every division within the company. These results show that the bank is on very solid footing heading into 2020. Analysts expect EPS of $10.82 for 2020.
Dividend and valuation analysis
Like most large financial institutions of the era, JPMorgan was forced to cut its dividend during the depths of the last recession. The company reduced its dividend by almost two-thirds in both 2009 and 2010. JPMorgan returned to dividend growth in 2011 and has increased its dividend at least once per year every year since. After increasing its dividend by 12.5% for the Dec. 31, 2019 payment, the company now has nine consecutive years of dividend growth.
JPMorgan has increased its dividend by an average of:
- 13.9% per year over the last three years.
- 12.8% per year over the last five years.
- 5% per year over the last 10 years.
The dividend growth rates have been trending higher over the various periods of time. The most recent raise was slightly below the short and medium-term averages, but still within reach of these figures.
JPMorgan’s dividend is also very safe and likely to continue to grow for years to come. The company paid out $3.30 in dividends per share last year. The company will most likely pay out at least $3.60 in dividends per share in 2020. Using updated analysts’ estimates of $10.82 EPS for the current year, the payout ratio is 33%. These ratios are either identical or very close to the 31% payout ratio that JPMorgan has had since the company returned to raising its dividend in 2011.
This payout ratio gives JPMorgan a significant cushion should EPS suffer a severe decline. Income investors should note that dividend growth is likely dependent on EPS growth given that the long-term average payout ratio and the forward payout ratio are similar. Fortunately for income investors, JPMorgan has compounded EPS at a rate of 12.3% over the last five years.
Shares yield 2.6% as of Jan. 16, which is 80 basis points higher than the 1.8% average yield of the S&P 500. Investors buying JPMorgan today are getting an above market average dividend yield that is well protected and likely to continue growing in the future.
Not only that, investors are getting a stock that is attractively valued.
JPMorgan’s valuation remains reasonable despite the rally in shares over the last year. The stock closed the Jan. 15 trading session at $137.00. Using full year 2019 results, shares have a trailing price-earnings ratio of 12.8. Using 2020 EPS estimates, the stock has a forward price-earnings ratio of 12.7. This compares to the stock’s five and 10-year average price-earnings ratios of 11.6 and 11.2, respectively.
While the stock is somewhat expensive against its own historical record, the valuation looks much better when compared to the average multiple of 24.7 for the S&P 500. Investors are likely concerned about paying too high of a multiple due to the financial sector’s performance during the last recession.
With the strength of JPMorgan’s business as well as the company’s dividend growth and payout ratio, I feel that the stock should trade for a slightly higher multiple than it currently holds. A price-earnings ratio of 14, which is a premium to the stock’s historical average but well below the average multiple of the market, seems reasonable. Based on 2020 estimates for EPS of $10.82, I believe shares of JPMorgan should be worth $151.00. This is more than 10% higher than the most recent closing price.
Final thoughts
JPMorgan finished the year on a high note as 2019 was a record year for the company in many ways. Most of the company’s divisions saw growth, and net interest income remained solid even with multiple rate cuts.
With analysts are not expecting much change in the company’s EPS for 2020, returns for the stock will likely have to come from multiple expansions. This seems very possible due to the company’s most recent earnings results and below market average valuation.
Investors buying today could be looking at a 10% share price growth to go along with a 2.6% dividend yield. Added up, JPMorgan offers a strong combination of both growth and income for investors.
Disclosure: I am long JPMorgan.
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