Is it finally time to buy banks?
As the popular narrative would have it, the Fed will finally raise rates this month after keeping them at zero for nearly a decade. Low rates have crimped bank profits, so higher rates will presumably mean a windfall for banks.
Maybe.
I’m not entirely convinced that this narrative makes sense. The Fed will probably raise rates by 0.25% this month because failing to do so would make them look weak and destroy what little credibility they have left. Failing to raise might even put Janet Yellen’s job at risk.
But given that the strong dollar is already killing the profits of U.S. multinational companies — and given that the economy is still extremely wobbly by several measures — it’s hard to see the Fed following a “normal” tightening cycle. And I don’t see a 0.25% – 0.5% hike in the Fed Funds rate making that big of a difference to the megabanks’ bottom lines.
That said, banks are one of the few relatively cheap pockets of the market we have left. While the S&P 500 is, amazingly enough, still flirting with new all-time highs.
Let’s take a look today at JPMorgan Chase (JPM), considered by many to be the best of the lot.
JPM Stock by the Numbers
Like most of its peers, JPM stock is cheap, trading at 11.3 times trailing earnings and 10.7 times next year’s expected earnings.
Even more impressively, it trades at just 1.1 times book value. That’s not crisis cheap — back in 2009, JPM stock traded for less than half its book value. But it puts JPMorgan Chase at roughly the same valuation it fetched in 2010, when its financial position was a lot more wobbly.
As a point of comparison, Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) trade for 0.8, 0.79 and 1.65 times book value, respectively. So, while JPM stock does not immediately appear “cheap” compared with some of Big Bank peers, it’s in the middle of the pack. And we have to remember that JPMorgan Chase is a healthier bank that did a far better job than some of its peers in navigating the mortgage meltdown.
And About That Dividend …
Let’s now take a look at the JPM stock dividend.
At current prices, the stock yields 2.6%. That’s nothing special, but it’s worth mentioning that it is significantly higher than the current 2% yield on the S&P 500. If you’re buying JPM stock for its dividend, then you’re probably banking on dividend growth. And with a payout ratio of just 29%, there is certainly a lot of room for JPM to hike its dividend.
This is where it gets interesting. The Fed still has to approve dividend hikes and share repurchases. The Fed has been somewhat stingy in that respect, pushing the banks to keep more capital on hand as a buffer against a future calamity. Well, as the financial system inches ever closer to “normal,” the Fed is expected to get more lenient in approving dividend hikes.
Earlier this year, JPMorgan CEO Jamie Dimon indicated that he wanted to see JPM’s dividend payout ratio rise to about 50% of income. Between steady earnings growth and a boost to the payout ratio, investors could be looking at a doubling of the dividend in relatively short order.
Given the alternatives in an otherwise overpriced market … that doesn’t sound too shabby.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. As of this writing, he did not hold a position in any of the aforementioned securities.
