In the second round of the Dividend Portfolio playoffs we have #9 seeded JPMorgan Chase & Co. (JPM) taking on #1 seeded L-3 Communications Holdings Inc. (LLL). L-3 Communications is a prime contractor in command, control, communications, intelligence, surveillance, and reconnaissance systems, aircraft modernization and maintenance, and government services. JPMorgan is a financial holding company and is engaged in investment banking, financial services for consumers and small business, commercial banking, financial transaction processing, asset management and private equity.
The following table depicts the recent earnings reports for each company:
($ in billions)
($ in billions)
JPMorgan is up 29.54% excluding dividends in the past year (up 31.61% including dividends) while L-3 Communications is up 36.78% excluding dividends (up 38.73% including dividends), and the S&P 500 has gained 25.33% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven game series click here. Not all the metrics will be looked at if a team can win and win early. This matchup will determine the winner, which will go on to the next round of the playoffs to face Amgen, Inc. (AMGN) for the Dividend Growth Portfolio Super Bowl.
Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve-month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. JPMorgan carries a 1-year forward-looking P/E ratio of 9.8, which is inexpensively priced for the future right now while L-3 Communications' 1-year forward-looking P/E ratio of 13.02 is also inexpensively priced. Game 1 goes to JPMorgan.
This metric is the trailing twelve-month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five-year estimated growth rate, however I like to use the one-year growth rate. This is because as a capital projects manager who performs strategy planning for the research and development division of a large-cap biotech company, I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one-year forecast as opposed to a five-year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for JPMorgan is currently at 0.37 based on a 1-yr earnings growth of 35.99% while L-3 Communications' 1-yr PEG ratio is not measurable as it has a negative earnings growth projection next year. JPMorgan is victorious in Game 2 of the series and takes a two game lead.
EPS Growth Next Year
This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one-year earnings growth projection as opposed to the five-year projection based on what I discussed in the PEG section above. JPMorgan has a projected EPS growth rate of 35.99% while L-3 Communications sports a contraction rate of 2.16%. JPMorgan has now taken a three game lead in this best of seven series.
Dividend yield is a no brainer; it must be had in a dividend portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. In my dividend portfolio I don't discriminate against low yielding stocks as long as they provide excellent fundamental metrics in the form of the forward P/E, the 1-yr PEG and the 1-yr EPS growth rate. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve-month earnings. JPMorgan pays a dividend of 2.59% with a payout ratio of 34% of trailing 12-month earnings while L-3 Communications pays a dividend of 2.07% with a payout ratio of 25% of trailing 12-month earnings. JPMorgan takes yet another game away from L-3 Communications and sweeps the series.
Although JPMorgan upset L-3 Communications in the series, L-3 Communications is still a great company for a dividend portfolio that is operating in an excellent industry. However, the earnings growth contraction for 2014 is what troubles me about L-3 Communications. Because I am a value dividend investor, the first three matches carried the most importance because they were fundamental metrics and JPMorgan appeared to be the better valuation stock because it has the greater growth potential. After beating L-3 Communications, JPMorgan will advance to the next round of playoffs and battle with Amgen.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!