Why to invest in jpm stock?

Leading bank JP Morgan is cheaper than other top banks at 11 times earnings because it's less sensitive to a hot economy and rising rates. A perusal of JPM financials shows 33% more non-interest income than BAC, meaning less help from rising rates but the safety of multiple income streams for long-term investors.

JP Morgan Chase (NYSE:JPM) has a storied history going back to the 19th Century. It provided much of the financing for the American railroad system as well as the consolidation of Andrew Carnegie's holdings and other steel companies into U.S. Steel. Following the Panic of 1893, it arranged a purchase of $62 billion of gold from Europe to shore up the US Treasury, and in the midst of the Panic of 1907 J.P. Morgan himself called major financiers together to organize the financing which prevented the collapse of the nation's monetary system. This is the profile of a merchant bank along the lines of such historic financiers as the Medici, the Fuggers, and the Rothschilds.

Today's JP Morgan is the closest thing to such a bank still existing in the world. Its CEO Jamie Dimon, who has run JP Morgan Chase since 2005, is the closest individual leader to the merchant bankers of old. Under his leadership JPM has surpassed larger foreign banks and established dominance as the world's #1. Dimon ranks with Warren Buffett as one of the two most respected business leaders of this era. And his annual shareholder letters compete with Buffett's for popularity and the expectation that they will provide useful information for investors. Running JPM, which has important businesses in many countries, is something like running an empire and as is the case with Buffett, his position provides daily information from its several divisions enabling him to keep his finger on the pulse of global business developments.

Understanding this context is an important first step in understanding the prospects of JP Morgan for 2022 and the near future. It combines ordinary consumer/community banking with investment banking and high end wealth management on a scale that is large enough for it to break out the "mass affluent" and affluent in reporting results. No other U.S. bank comes close in the balance and relative importance of all these separate categories. While four Chinese banks and one Japanese bank are larger by some measures, (JPMorgan is #6 globally), JPM is by far the most influential bank on the planet. It is among the top ten stocks by market cap in the Vanguard S&P 500 Index ETF (VOO) and ranks #2 in the Vanguard S&P Value Index ETF (VOOV), in both cases ranking just behind Berkshire Hathaway (BRK.A)(BRK.B).

Its place as the world's leading merchant bank frames the question of its performance this year. Investors in bank stocks may be puzzled by the fact that JP Morgan, the bluest of blue chip banks, is cheaper than the second ranked large bank, Bank of America (BAC). In terms of Price Earnings Ratio (P/E), the P/E of BAC is 27.5% higher than that of JPM (13.86 versus 11.05). JPM is thus cheaper by that whopping margin. Is that rational? The answer lies in the market's estimate of the economy. As a bank heavily weighted toward consumer banking, Bank of America should profit more from rising interest rates and a hot economy. JP Morgan's valuation is being penalized for its lack of sensitivity to the economy and rising rates.

There are two ways of looking at this. The short version is that if the economy continues to run hot with high inflation, JPM will do less well than other major banks - this year anyway. That's not so bad. It's still a consistent and highly profitable bank which does well in good times and bad. When the economy does less well it will shine as it did in 2008-2009 as many other financials failed. In fact, JPM had to be coerced by the Federal Reserve to accept TARP rescue funds so that the banks which were actually in big trouble would not stand out. Its buyback policy also reflects its deep conservatism. JP Morgan consistently buys back 2% or 3% of its shares, preferring to keep strong cash reserves while more aggressive banks including Bank of America have committed to use roughly 100% of total earnings for buybacks this year. JPM also offers a consistently rising dividend with a yield of 2.42% for an overall shareholder return likely to be 4-4.5%.

Somewhat offsetting the relatively low shareholder return is the fact that JPM is extraordinarily cheap at 11.05 times earnings, a ratio suitable for financials going through hard times operationally, which JPM is not. Many contemporary bank investors have little memory of the way banks were traditionally priced. Before the crisis of 2008-2009 banks were priced at a much lower discount to the market P/E. If priced that way today, large banks as a whole might have a P/E of roughly 15. That would leave quite a bit of room for capital appreciation for JP Morgan in 2022. Safety, dividend, buybacks, and capital appreciation are a pretty good combination. Bank of America, its leading competitor, might do better with strong growth in the economy and rising interest rates, but it comes with higher risk and has less space for valuation increase.

A good starting point is the breakdown of JP Morgan business sectors by the percentage of their contribution to revenues. They are as follows:

This breakdown into relative sector contribution to revenue tells the story of JP Morgan Chase as compared to all other large U.S. banks. Of the above sectors, a single metric explains the difference from other major banks. Bank of America, Wells Fargo (WFC), and Citi (C), ranked in that order by total size, are all far more heavily concentrated in Consumer and Community Banking.

This difference accounts for the fact that all three of the other large banks are much more sensitive to the economy and rising rates. A much higher proportion of their business has revenue and earnings closely tied to interest income from Consumer and Community loans. In its slide presentation for Q3 earnings Bank of America estimated that loan income would increase by $7.2 billion with a 100 basis point increase in interest rates. The expectation for JP Morgan is in the neighborhood of 10% less. That's despite the fact that JPM's market cap is about 27% higher. Think of it this way: JPM's sensitivity to market rates in its Consumer and Community lending is about the same as that of BAC and other large banks, but Consumer and Community lending makes up a far smaller part of its total business. Consider the numbers of the chart below representing an important component of JPM revenues:

Table From Data On Seeking Alpha

The Total Non-Interest Income of JP Morgan is 33% higher than its Net Interest Revenue of $51,968 while the Interest Revenue on Loans at Bank of America is about the same as Non-Interest Income. That rounds out the picture of JP Morgan as a global bank with many revenue sources some of which are inherently more stable than consumer lending. At the same time this makes JPM less sensitive to economic activity and the general level of interest rates.

On this site the overall Quant Ranking of JPM is about 3.5 out of 5. Among Diversified Banks it is ranked #13 out of 47 and in the Financial Industry #158 out of 615. Its Overall Ranking is #932 out of 4173. Its overall ranking of 932 is quite positive but it should also be remembered that many ranking systems (Joel Greenblatt's renowned "Magic Formula" value ranking of stocks that should beat the market pops into mind) exclude banks because their key metrics are so different from those of other businesses. JPM's already high rankings would probably rise in a system that fully recognized the metrics of financial companies.

The most spot-on of rankings which apply to many readers on this site are JPM's Dividend Grades. JPM is ranked A+ for Safety, B- for Growth, C for Yield, and A- for Consistency. I think that gets it about right. Few companies have the stability and safety of JPM. Its yield is a solid 2.42% and it has raised its dividend each year for the past nine years. All things considered it deserves its place on many lists of Dividend and Dividend Growth Stocks.

Several Factor Grades for other characteristics are puzzling. The objective and indisputable one is Earnings Revisions, which receives an A. Momentum receives a C+. This score mainly reflects the fact that JPM is a low beta stock. This means that it is less volatile than the market on both the up side and the down side. Last year the market for large cap stocks rose sharply. JPM simply does not move as much as tech stocks, highly speculative stocks, or stocks in more cyclical industries, but its Momentum has recently been strongly positive while many of the jazzier parts of the market have fallen precipitously. Its Growth numbers aren't spectacular but probably deserve a higher ranking than D+. and its Profitability Grade probably gets its F ranking from not being graded on several metrics. As to Valuation, the D+ ranking is truly a head-scratcher.

How can a solid company with growing earnings and dividends and a P/E of 11 deserve a D+ for Valuation. Ben Graham suggested that an ordinary company with zero growth deserved a P/E ratio of 15, and JPM is more than an ordinary company. One can make the argument that analysts as a whole, most of whom have no memories of normal times before 2008, don't fully grasp how cheap all the major banks are when measured against their longer-term history. Among the banks, one can also argue that an all-weather bank like JP Morgan shouldn't trade at a 27.5% discount to Bank of America even if BAC might be expected to have higher earnings growth in the coming year.

JP Morgan's competitors among the handful of major banks do not present a serious problem. All full-service banks do more or less the same thing in more or less the same way. Customer loyalty is very high and the nuisance of switching banks is a strong enough deterrent to serve as a moat.. The real risk is fintech startups. Jamie Dimon has made it clear in recent annual shareholder letters that he regards these startups as the major challenge and JPM has taken important steps to counter the challenges of technology, including bitcoin. Money is the major product of banking and a bank with the scale, reach, and resources of JP Morgan is well positioned to engage the new challengers.