Should You Buy JPMorgan Chase?
Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The U.S. economy continues to dig itself out of the hole caused by the 2008-2009 financial crisis and ensuing recession, the worst the country saw since the Great Depression. Slowly, but surely, businesses and individuals are regaining confidence and banks are finally returning to more robust lending.
Recent data points confirm that banks are finally loosening the lending spigots and are providing necessary financing to allow companies to grow.
Moreover, steady improvements in the housing and labor markets mean the nation’s financial sector is finally returning to normalcy. In that light, is this the time to add industry giant JPMorgan (NYSE: JPM) to your portfolio?
Mounting industry tailwinds
As previously mentioned, the credit crunch is finally easing. Banks like JPMorgan, Wells Fargo (NYSE: WFC), and Bank of America (NYSE: BAC) are lending again. Businesses are slowly expanding, and consumers are back to buying homes.
To that end, the Federal Reserve recently released a report which showed that $713 billion in credit flowed to U.S. households and nonfinancial businesses in 2012, roughly double the total from the year prior.
Moreover, according to the Standard & Poor’s Case-Schiller housing index, home prices rose 1.1% in March. This exceeded expectations and represented the biggest annual gain in nearly seven years.
Another industry tailwind is the rise in interest rates. Since banks traditionally borrow at short-term rates and lend at long-term rates, rising interest rates are generally seen as helpful for bank profitability. This is due to a variety of reasons, including higher returns on new investments, and increased profit margins on loans.
These catalysts are already being felt in the underlying operations of the nation’s biggest banks. JPMorgan recently reported a fantastic first quarter. First-quarter net income and earnings per share clocked in at record levels of $6.5 billion and $1.59 per share, respectively. This represented 33% growth in both metrics versus the first quarter last year.
Wells Fargo’s recent results were equally impressive. The bank achieved record net income in what was a very solid report. Revenue was roughly flat year over year, but diluted earnings per share rose 23% and the company expanded its return on average assets and return on equity ratios by 18 basis points and 145 basis points, respectively.
Bank of America has announced a number of positive developments in recent quarters, including a $5 billion common stock buyback and the redemption of $5.5 billion in preferred stock. The company is extremely optimistic about its capital structure and the future of the bank.
That being said, Bank of America is still haunted by memories of the financial crisis. Bank of America has paid more than $50 billion in mortgage-related legal fees to settle disputes made against its subsidiary Countrywide, which it acquired just before the financial crisis.
The bank reported first-quarter profit of $0.20 per share, missing analyst expectations. Bank of America has had to set aside gigantic sums of money for legal expenses. In the first quarter, the bank had litigation expenses of $881 million.
These expenses have hurt profitability and impeded the company’s ability to reward shareholders. The bank hasn’t been able to increase its dividend past a token level of $0.01 per share quarterly.
Bank on increased shareholder rewards going forward
Thankfully, the banks’ increasing financial success is being shared with investors. Both JPMorgan and Wells Fargo have begun to pay dividends again, after slashing their payouts down to pennies per share during the depths of the financial crisis.
Impressively, Wells Fargo has raised its dividend in two consecutive quarters. The company yields 3% and its annual dividend payment is up 36% from its payout level one year ago.
Likewise, JPMorgan is back to paying shareholders a healthy dividend, which yields nearly 3% at recent prices. On that basis, I’d consider both Wells Fargo and JPMorgan as best-of-breed banking giants in the United States.
JPMorgan trades for just 9 times trailing earnings per share, and is poised to grow further as a result of several positive industry catalysts. As a result, I consider JPMorgan to be an attractive stock at current prices and a compelling buying opportunity on any significant pullback.
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Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!