Analysts' Choice: J.P. Morgan Pulling Out Of Its Spin

12/7/2015


  Recent Price
$67
  Dividend
$1.76
  Yield
2.6%
  P/E Ratio
12
  Shares (millions)
3,726
  52-Week Price Range
$70.61 - $50.07

J.P. Morgan Chase ($67; JPM) and other U.S. banks are still paying the price of the financial meltdown in the form of unusually low interest rates and outsized legal settlements.

The low-rate environment has slowly squeezed J.P. Morgan's profitability. Net interest margin — the spread between borrowing costs and lending rates — has improved in just a single quarter since the start of 2010. Although the Fed appears poised to raise interest rates next month for the first time in nine years, the pace and magnitude of subsequent rate hikes will be far more important to earnings than the actual launch date.

In the aftermath of the 2008 financial crisis, J.P. Morgan has reached 26 different settlements that amount to a total of $40.12 billion in penalties, behind only Bank of America ($18; BAC), according to CNBC. J.P. Morgan's legal expenses surged 28% to $2.3 billion in the first nine months of 2015, and it could still face criminal charges for its role in selling mortgage securities that later soured. Yet the bank appears to be making headway on the litigation front. As of the end of September, the bank said its potential losses in excess of its legal reserves should not exceed $5.0 billion, down from $5.9 billion a year ago.

Despite its flaws, J.P. Morgan remains one of our favorite big banks. It scores above 80 for both Quadrix sector-specific scores and is rated a Buy and a Long-Term Buy.

Business shrinks, not dividend

Last month the bank said it expected trading revenue for the December quarter to hold flat, excluding the divestment of part of its commodities business. Total revenue declined 3% in the first nine months of 2015, putting the financial giant on pace to deliver its sixth consecutive year of lower annual sales.

That decline is partly by design. J.P. Morgan has shrunk its asset base in the past year to minimize the Federal Reserve's new capital surcharges, which will be imposed based on a bank's size and complexity. Nevertheless, a rate hike could jump-start the bank's sluggish operating momentum. Operating profit margin has declined in six of the past seven quarters, while return on equity remains below levels the bank enjoyed prior to the financial meltdown.

J.P. Morgan's stock has generated a 9% total return so far this year — nearly triple any other stock in the S&P 1500 Index diversified-banking industry. Yet J.P. Morgan shares trade at least 8% below their industry median for trailing P/E, P/E on estimated 2016 profits, and trailing price/sales. Compared to the broader financial sector, the stock offers discounts in excess of 25% for each of these ratios. J.P. Morgan's price/book ratio of 1.1 also lags its sector median of 1.7.

Conclusion

The dividend yields 2.6%, exceeding the company's five-year average of 2.4% and industry average of 1.8%. J.P. Morgan has grown the dividend at an annualized rate of 52% over the past five years, highest among industry peers. The dividend represents a conservative 32% of earnings, leaving flexibility for future growth.

An annual report for JPMorgan Chase & Co. is available at 270 Park Ave., New York, NY 10017; (212) 270-6000, www.jpmorgan.com.

J.P. MORGAN CHASE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '15
1.32
vs.
1.36
-6%
70.61
-
50.07
13 - 9
Jun '15
1.54
vs.
1.46
-4%
69.82
-
59.65
13 - 11
Mar '15
1.45
vs.
1.28
2%
62.96
-
54.27
12 - 10
Dec '14
1.19
vs.
1.30
-2%
63.49
-
54.26
12 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
102.10
5.29
1.56
63.49
-
52.97
12 - 10
2013
105.79
4.35
1.36
58.55
-
44.20
13 - 10
2012
107.08
5.20
1.15
46.49
-
30.83
9 - 6
2011
110.84
4.48
0.80
48.36
-
27.85
11 - 6
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
83
46
84
66
74
54
66

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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