Investors rely on dividend stocks for their capacity to produce reliable income and capital appreciation. While the latter is achieved through a long-term investing strategy, the former is much more immediate. The dividend is distributed quarterly, in most cases, and many investors count on that payout to supplement their income. So, they want a dividend stock that consistently delivers -- no matter the economic or financial conditions. In short, they want a dividend they can trust.
While there are many reliable dividends, there are few as trustworthy as JP Morgan Chase (NYSE:JPM). Here's why.
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One of the best dividends in the sector
Let's take a look at the numbers first. JPMorgan Chase has increased its dividend each of the past nine years, and over the last three years it has gone up about 79%. The fact that the company was able to maintain its dividend this year -- the worst for banks since the Great Recession -- is a great sign of its stability and reliability.
JPMorgan maintained a $0.90 quarterly dividend in the second quarter, which translates to an annual payout of $3.60 per share. At Tuesday's closing price, that works out to a roughly 3.5% yield (the measure of a year's worth of dividends as a percentage of the stock price). That's one of the better dividends in the financial sector and among the best on the market. JPMorgan also has an excellent payout ratio of roughly 13.5% -- in other words, it only needs 13.5% of earnings to pay its dividend.
The company has not yet declared a dividend for the third quarter, but on the second-quarter earnings call, officials said they expect to maintain that $0.90 payout, barring some extreme adverse scenario. CFO Jennifer Piepszak defined that as a GDP that was down nearly 14% at the end of 2020 compared to the previous year and unemployment at nearly 22%.
Even under this scenario, Piepszak estimates that the company would end the year with a CET1 ratio above 10% -- albeit under the minimum capitalization mark required by regulators, which will be 11.3% as of Oct. 1. But thatʻs an extreme long shot at this point, as unemployment has come down to 8.4% and the GDP is projected to be down only 3% to 4% this year, with growth expected in 2021.
Chairman and CEO Jamie Dimon said on the call that the dividend is completely sustainable: "So, it would be, kind of, be foolish to guess the future of extreme adverse and cut your dividend because we can easily get through very, very tough times and never cut the dividend."
Building a fortress
The company has built a "fortress balance sheet," a term that Dimon uses to describe his philosophy of building a balance sheet so sturdy it can withstand anything. The bank outperformed during the Great Recession thanks to its strong balance sheet that enabled it to ride out the downturn without having to make deep cuts or shelve major investments.
In this recession, it's a similar story as JPMorgan has outperformed its megabank peers. In the second quarter, the bank had a 15% increase in revenue from the same period the year before and an efficiency ratio of 51% (efficiency ratio measures operating costs as a percentage of net revenue; a number down in this range is very good). Earnings were down 51% due to a $10.4 billion allowance for anticipated credit losses, but the common equity tier 1 ratio remains a sturdy 12.1%, comfortably above the regulatory minimum, with plenty of liquidity. Dimon said in the second-quarter earnings report:
However, we are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm. We ended the quarter with massive loss absorbing capacity -- over $34 billion of credit reserves and total liquidity resources of $1.5 trillion, on top of $191 billion of CET1 capital, with significant earnings power that would allow us to absorb even more credit reserves if needed. This is why we can continue to serve all of our stakeholders and to pay our dividend -- unless the economic situation deteriorates materially and significantly.
What this all means is that JPMorgan is as stable as it gets in the financial sector, and if it can weather this storm with its excellent dividend intact, then you can trust that it will deliver as conditions gradually improve over the next few quarters and beyond.
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September 09, 2020 at 05:00PM
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