JP Morgan Chase is part of the banking cartel. This bank is run by Keynesian morons. Even the Keynesian financial press is catching on: http://www.google.com/finance/company_news?q=NYSE:JPM# The politicians are using JPM’s losses to campaign for more government intervention into the financial markets. The problem is not JPM’s proprietary trading losses. The problem is the moral hazard created by Federal Reserve System bailouts. These bankers would not take so much risk if the Federal Reserve was behind them with a bailout. I would never buy a bank stock even if it had a high dividend because you never know what assets they really own. However, I decided to do some First Look analysis on JP Morgan Chase for those of you who will buy a bank stock.
JP Morgan Chase (JPM)
Price: $36.15
Shares: 3.81 billion
Market capitalization: $137.57 billion. Most of JP Morgan’s capitalization is in the form of debt. Benjamin Graham, the father of value investing, recommended that you avoid ordinary industrial companies in which more than 30% of their total capitalization is in bonds. Graham also warned investors against the purchase of financial companies and insurance companies because their composition of their assets are opaque.
What does the company do: JP Morgan Chase is one of the largest financial institutions in the U.S., with more than $2 trillion in assets and operations in more than 60 countries. The company is organized into six business segments: investment banking, commercial banking, treasury and securities services, asset management, retail financial services, and credit card businesses. JP Morgan Chase is a major player in the derivatives markets.
Morningstar’s take: Jamie Dimon, Morningstar's 2002 CEO of the Year, has a well-deserved reputation as one of the best bankers in the business. Indeed, JP Morgan Chase made it through the worst of the financial crisis in remarkably good shape, adding Washington Mutual's retail banking operations and Bear Stearns' investment bank to its already wide-ranging lines of business. In our view, much of JP Morgan Chase's outperformance was due to common sense risk management. For example, the bank carried far more tangible capital than Citigroup C in early 2008, providing a much larger buffer against subsequent losses. Additionally, JP Morgan Chase bought Washington Mutual in an FDIC-assisted transaction, while Bank of America BAC may be on the hook for billions of dollars in additional liabilities thanks to its open market purchase of Countrywide and certain subsequent actions. As a result, JP Morgan Chase is now the largest bank holding company in the U.S., with more than $2 trillion in assets.
Bonds: $525.8 billion outstanding. That is a huge amount of debt.
Times interest earned: In 2011, JPM had net income for its common stock of $17.568 billion. They amassed $13.604 billion in interest expenses on their bonds. Therefore, they only earned 1.29 times their interest expenses. I believe that their interest expenses are a threat to their dividend because they earned significantly less than five times their interest expenses.
Preferred stock: JPM paid $1.408 billion in preferred stock dividends in 2011.
DIVIDEND RECORD: JPM cut its dividend severely in 2000 and 2009. In 2000, the dividend was nearly $1.00 per share quarterly. They cut it to $0.38 per quarter.
Dividend: $0.30 quarterly
Dividend yield: 3.32% ($1.20 / $36.15 share price)
Dividend payout: 27% ($1.20 / $4.50 using 2011 EPS) –OR- 38% ($1.20 / $3.20 using average earning power)
EARNING POWER: $3.20 @ 3.81 billion shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
EPS | Net income | Shares | Adjusted EPS | |
2005 | $2.38 | $8,483 M | 3,557 M | $2.23 |
2006 | $4.04 | $14,444 M | 3,574 M | $3.79 |
2007 | $4.38 | $15,365 M | 3,508 M | $4.03 |
2008 | $1.35 | $4,931 M | 3,522 M | $1.29 |
2009 | $2.26 | $8,774 M | 3,880 M | $2.30 |
2010 | $3.96 | $15,764 M | 3,977 M | $4.14 |
2011 | $4.48 | $17,568 M | 3,920 M | $4.61 |
Seven year average adjusted earnings per share is $3.20
Consider contrarian buying below $25.60 (8 times average adjusted EPS)
JP Morgan Chase (JPM) is currently trading at 11.3 times average adjusted EPS. This is stock is value priced.
Consider value buying below $38.40 (12 times average adjusted EPS)
Consider speculative selling above $64.00 (20 times average adjusted EPS)
BALANCE SHEET – The assets are not real thanks to accounting fictions, but the liabilities are real. Too much debt (red)!!
Book value per share: $48.18 ($183.573 B equity / 3.81 B shares)
Price to book value ratio: 0.75 (under 1.0 is good), but I don’t trust the accounting standards regarding bank asset values.
Tangible book value per share: $32.80 (equity less goodwill and intangibles = $124.955 B / 3.81 B shares)
Price to tangible book value: 1.10 (near 1.0 is good). Same comment as above. I don’t trust the asset values.
Current ratio: N/A latest quarter (over 2.0 is good) Banks are borrowed short and lent long.
Quick ratio: N/A latest quarter (over 1.0 is good) Banks are borrowed short and lent long.
Debt to equity ratio: 1.41 (lower is better)
Percentage of total assets in plant, property, and equipment: 0.61% (the higher the better)
Working capital trend: Not available because bank balance sheets do not break out current assets and current liabilities; otherwise, the investors would realize how leveraged they are. Banks and financial institutions are always borrowed short and lent long.
CONCLUSION – If you must own a bank stock, then wait for the next Keynesian banking crisis. You won’t have to wait too long thanks to the central bankers and commercial bankers in Europe. JPM traded for below $20.00 per share during the height of the Panic of 2008. You’ll be able to get it for the same price or less during the next crisis. Their 3.32% dividend yield is currently better than the S&P 500 average of 2.2%, but beware: JPM has a history of dividend cuts during financial crisis. The stock is value priced compared to their average adjusted earning power, but it will decline a lot during the coming financial crisis. The balance sheet is that of a standard too-big-to-fail bank…it is loaded with toxic sovereign debts of the PIIGS and other Keynesian malinvestments. Don’t buy it.
DISCLOSURE – I don’t own JP Morgan Chase (JPM) and I never will.
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