In reality, there are very few companies out there that are good long-term investments. The best companies are run buy high-quality managers who have been with the business for years and are well-qualified in the strategy of capital allocation.
One of the CEOs that ticks all of these boxes isJPMorgan (JPM, Financial) chairman and CEO Jamie Dimon.
Over the past decade, Dimon has steered JPMorgan through the financial crisis successfully, and the business has now returned to its growth trajectory. And while past performance is no guide to the future, if the group continues as it has done over the past 10 years, over the next few decades, this should be one of the best-performing companies in the S&P 500.
Indeed, since July 2004, the bank has increased tangible book value at a compound annual rate of 12.7%, compared to just 8.8% for the S&P 500.
Dimon's capital allocation
This double-digit return is almost entirely thanks to the capital allocation decisions made by Dimon and his team over the period. And in the 2017 full-year letter to investors, the CEO shed some more light on how the bank is planning to deploy its capital going forward.
"We want to remind our shareholders that we much prefer to use our capital to grow than to buy back stock. Buying back stock should only be considered when we either cannot invest (sometimes that’s a function of regulatory policies) or when we are generating excess, unusable capital. We currently have excess capital, but due to recent tax reform and a more constructive regulatory environment, we hope, in the future, to use more of our excess capital to grow our businesses, expand into new markets and support our employees."
"In the last five years, we have bought back nearly $40 billion in stock. In prior years, I explained why buying back our stock at tangible book value per share was a no-brainer. Six years ago, we offered an example of this, with earnings per share and tangible book value per share being substantially higher than they otherwise would have been just four years later." -- Jamie Dimon 2017 full-year letter to investors."
Dimon is acutely focused on generating the best returns for JPMorgan's investors. Much like Warren Buffett (Trades, Portfolio), he uses book value as a yardstick of the bank's performance and is focused on improving this metric to achieve the best returns for investors.
"As you know, we believe tangible book value per share is a good measure of the value we have created for our shareholders. If our asset and liability values are appropriate — and we believe they are — and if we can continue to deploy this capital profitably, we now think that it can earn approximately 17% return on tangible equity for the foreseeable future. Then, in our view, our company should ultimately be worth considerably more than tangible book value."Â
And much like Buffett, Dimon is not concerned with short-term performance; he's in it for the long term, as the quote below clearly lays out.
"We do not worry about the stock price in the short run, and we do not worry about quarterly earnings. Our mindset is that we consistently build the company — if you do the right things, the stock price will take care of itself. In the next section, I discuss in more detail how we think about building shareholder value for the long run while also taking care of customers, employees and communities."
There's something that excites me about Dimon's commentary in his letters. Banks might have earned themselves a bad reputation in the financial crisis, but it looks as if this CEO is doing everything he can to reestablish trust. It is also refreshing to see a CEO that is focused on long-term returns and is not prepared to juice short-term performance to meet analyst expectations.
The banking sector has restructured itself significantly over the past decade. It is now better capitalized than ever before and risk adverse.
What's more, banks like JPMorgan are returning billions of excess capital to investors. Hopefully, this trend will continue, and it looks to me as if the best bank to play this trend for the next decade or maybe more is JPMorgan thanks to Dimon's long-term outlook.
Disclosure: The author owns no stock mentioned.
