Following a successful stress test in late June, JPMorgan Chase & Co. (NYSE:JPM) was among the banks that announced dividend hikes. Yet despite the hike and an earnings beat, the stock seems to be declining, hit by the broad market decline as well as the sector decline on renewed pandemic fears.
JP Morgan reported a solid second quarter as they trimmed US$3b in loan loss reserves that were set aside for emergency purposes in the last year. Earnings came in at US$3.78 per share, beating the estimate by 0.67, with the US$31.4b in revenue - 1.5 above the estimates.
However, the stock has declined 5.5% since then. This doesn't come as a surprise, since the overall market experienced one of the strongest one-day drops in months, but the financial sector has been leading the decline. Given that we are in the period of seasonal weakness for equities, it doesn't take a lot to spook the investors - in this case, the Delta variant of the coronavirus.
JPMorgan Chase is expecting to increase the current dividend of US$ 0.9 to 1 by the third quarter of 2021. Owning a strong business and reinvesting dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A 2.4% yield is nothing to get excited about, but investors probably think the long payment history suggests JPMorgan Chase is a long-run dividend investment. The company also bought back stock during the year, equivalent to approximately 1.1% of the company's market capitalization at the time. Overall, JP Morgan can buy back up to US$30b of shares in the near future.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. JPMorgan Chase paid out 24% of its profit as dividends, over the trailing twelve-month period. This is a rather low payout ratio, giving the company enough buffer to keep the dividend even through potential turmoils.
Consider getting our latest analysis on JPMorgan Chase's financial position here.
Dividend Volatility and Growth Potential
Before buying a stock for its income, we want to see if the dividends have been stable in the past and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of JPMorgan Chase's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was US$0.2 in 2011, compared to US$3.6 last year. This works out to be a compound annual growth rate (CAGR) of approx. 34% per year over that time. Solid dividend growth and no notable cuts to the dividend over a lengthy period of time sends a positive signal.
Analyzing earnings per share (EPS), we can see that they have been growing rapidly at 20% per annum. Although the company retains a majority of the earnings, it can be a positive move if that capital is reinvested effectively.
When we look at a dividend stock, we need to form a judgment on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're glad to see JPMorgan Chase has a low payout ratio, as this suggests earnings are being reinvested in the business.
Yet, with the equities in the season of weakness, the financial sector under pressure, and JP Morgan forming a head&shoulders technical pattern, it might be smart to observe the situation from the sidelines.
That said, we were glad to see it growing earnings and paying a fairly consistent dividend. JPMorgan Chase fits all of our criteria, and we think it should be on yield investors' watchlist.
Investors generally tend to favor companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for JPMorgan Chase that investors should take into consideration.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.