JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon jolted the markets this week when he announced an increase in the company’s quarterly dividend from 20 cents to 30 cents — good for a nearly 2.8% yield — right before the release of the Fed’s financial “stress tests.”
The company also announced a plan to buy back a staggering $15 billion in stock, which would come to about 8% of the outstanding shares. About $12 billion is approved for 2012 and the remaining $3 billion is slated for the first quarter of 2013.
As a result, JPMorgan’s stock price shot up nearly 10% going into Friday, bringing JPM’s year-to-date gains past 30%.
So is there anymore upside left in JPMorgan right now? Let’s take a look at the pros and cons:
Massive Scale: JPMorgan is the biggest bank in the United States, with more than $2 trillion in assets and operations in more than 60 countries. Besides traditional banking, the company also generates substantial revenues from asset management, investment banking and treasury services. Last year, JPMorgan generated $19 billion in net income, or $4.48 per share, with revenues close to $100 billion.
Leadership: Dimon is perhaps the world’s top banker. Because of his conservative policies — at least compared to rivals like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) — he was able thrive during the 2008 financial crisis. During this time, he picked up choice assets like Bear Stearns and Washington Mutual — with federal government assistance. Even during the European crisis, Dimon demonstrated his knack for understanding risk levels. The result was that JPMorgan had relatively low exposure to the instability.
Economic Growth: This is critical for JP Morgan. With the U.S. economy showing signs of a rebound, there should be more opportunities for lending — which will drive strong growth in revenues and profits.
Regulations: These definitely are a drag for JPMorgan, as well as the rest of the banking industry. Capital requirements are now more onerous, and the federal government has cracked down on overdraft and interchange fees, cramping banks’ sources of revenue and forcing them to consider additional — and unpopular — fees for things like checking accounts. There also are tough restrictions on proprietary trading.
Low Rates: Banks generally make profits on the difference between the rates they pay on deposits and the interest they charge on loans. The problem is the margin between the two has been thin, which has made it tough to generate profits. While this low-rate environment might get better eventually, it won’t in the near-term, presenting a challenge.
Real Estate: There are signs of improvement in the real estate market, but it’s far from clear whether they are sustainable. A large number of homes still have delinquent loans, though, and if there’s a strong real estate rebound, it likely won’t be for years down the road.
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While real estate and regulations will likely be a problem, JPMorgan’s prospects still look promising. Dimon is focused on managing risks and finding ways to reward shareholders, such as with dividends and buybacks. And JPM shares still are fairly cheap despite this year’s run-up, coming to 10 times earnings.
So for now, the pros outweigh the cons on JPM shares.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.