- Find out which company has a higher growth rate and lower P/E Ratio.
- Chase & Wells Fargo are the 2 largest US banks by market cap.
- Chase had negative revenue growth for the 2nd quarter of 2014.
- Wells Fargo increased pre-tax earnings 4% for the 2nd quarter of 2014.
- Chase & Wells Fargo both have unusually high volatility.
JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) are the two largest US banks based on market capitalization. Chase has a market cap of about $219 billion, while Wells Fargo has a market cap of about $267 billion.
This article examines Chase and Wells Fargo using the 5 Buy Rules from the 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing identifies high quality businesses trading at fair prices or better prices. The 8 Rules of Dividend Investing works by comparing businesses with a long history of dividend payments. This type of comparison creates a quantitative way to determine and rank high quality dividend stocks.
Consecutive Years of Dividend Payments
Wells Fargo has increased its dividend payments each year since 2010. The company cut its dividend payments in 2009 due to the financial crisis after a long history of dividend increases.
Chase has a similar dividend history to Wells Fargo. Chase has increased its dividend each year since 2010. The company also had a long history of steady or rising dividends before cutting payments in 2009 and again in 2010.
Neither Chase nor Wells Fargo meet the minimum 25+ years of dividend payments without a reduction that the 8 Rules of Dividend Investing requires. With that said, Chase and Wells Fargo are the two largest US banks. Both businesses have a long history of earnings and dividend increases except, with the one blemish being the financial crisis of 2009.
Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year. Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2.
- Chase has a dividend yield of 2.77%, the 45th highest out of 129
- Wells Fargo has a dividend yield of 2.74%, the 47th highest out of 129
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013. Source: Dividends: A Review of Historical Returns
- Chase has a payout ratio of 39.41%, the 42nd lowest out of 129
- Wells Fargo has a payout ratio of 34.57%, the 27th lowest out of 129
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006. Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3
Long-Term Growth Rate
The long-term growth rate of each business is calculated as the lesser of the 10-year per share growth in either dividends or revenue.
- Chase has a growth rate of 1.51%, the 109th highest out of 129
- Wells Fargo has a growth rate of 3.05%, the 89th highest out of 129
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013. Source: Rising Dividends Fund, Oppenheimer, page 4
Long-term volatility for each business is calculated as the 10-year price standard deviation.
- Chase has a standard deviation of 43.52%, the 121st lowest out of 129
- Wells Fargo has a standard deviation of 47.59%, the 125th lowest out of 129
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011. Source: Low & Slow Could Win the Race, page 3
Chase Current Events & Growth Prospects
Chase's revenue decreased 2% for the second quarter of 2014 versus the second quarter of 2013. Chase operates in 5 segments. Total revenue, income, and revenue growth for each segment is shown below:
% of Total Income
Consumer & Community Banking
Corporate & Investment Banking
Private Equity & Corporate
Source: Chase 2nd Quarter Earnings Release
* Income higher than revenue due to tax adjustments in corporate section
Chase's bright spot in the 2nd quarter is its Asset Management segment. The segment managed to grow revenue 8% compared to the 2nd quarter of 2013. The segment's strong growth comes from a 16% increase in assets under management. The assets under management increase came largely from increases in equity market valuations, coupled with net inflows from clients. Asset management currently accounts for 9% of Chase's overall income.
Chase's largest segment is Consumer & Community Banking. The segment saw revenues decline 5% due to spread compression, lower mortgage warehouse balances, and lower mortgage fees. The segment will likely resume growth when spreads expand and if the economy continues to improve. Declines were partially offset by higher deposit balances.
Chase's 2nd largest segment is Corporate & Investment Banking. The segment was responsible for 1/3 of all Chase income in the 2nd quarter of 2014. The segment also realized the largest revenue decline, down 9% versus the 2nd quarter of 2013. The company's revenue decline came from double digit declines in market and investor service revenue and fixed income markets revenue due to low levels of volatility and declining client activity.
Chase returned $1.5 billion to shareholders in the form of share repurchases in the 2nd quarter of 2014, which is about 0.6% of total market cap at current prices. The company also raised its dividend payments from $0.38 per quarter to $0.40 per quarter.
One of Chase's advantages over peers is its size and diversification across different sectors of the financial market. The company has managed to trim overhead and is now one of the most efficient large financial corporations.
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Source: Chase 2014 Investor's Day Presentation
Wells Fargo Current Events & Growth Prospects
Wells Fargo is the largest US bank based on market capitalization. The company has 70 million customers served in over 9,000 locations across the US.
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Source: Wells Fargo 2014 Credit Suisse Presentation
Wells Fargo's 2nd quarter results saw pretax earnings increase 4% compared to the 2nd quarter of 2013. Wells Fargo saw steady growth in its deposits which are up 9% year over year. Total loans grew 3.6% for the 2nd quarter of 2014 versus the 2nd quarter of 2013.
Wells Fargo operates in 3 Segments: Community Banking, Wholesale Banking, and Wealth, Brokerage, and Retirement. Community Banking is the largest segment with 58% of the company's income. Wholesale banking is responsible for 33% of income, while Wealth, Brokerage, and Retirement make up the remaining 9% of income.
The Community Banking segment saw revenue decrease 3% from the second quarter of 2014. Revenue was down due to weakness in Wells Fargo's mortgage business. On the bright side, average loans, assets, and core deposits all increased from the same quarter one year ago. Wells Fargo's community banking segment will likely resume revenue growth in the subsequent quarters, as the company has managed to grow underlying assets, loans and core deposits consistently.
The Wholesale Banking segment performed very similarly to the Community Banking segment. Revenue was down 3% compared to the 2nd quarter of 2013, while underlying loans, assets, and core deposits increased. Assets under management for the company's asset management branch grew as well, up over 7% from both capital inflows and expanding market valuations.
The company experienced 9% growth in its Wealth, Brokerage, & Retirement segment. This segment achieved strong growth due to overall market growth. The company's growth in this segment is detailed below:
- Retail Brokerage assets up 12%
- Wealth Management assets up 10%
- Retirement Assets up 13%
The 8 Rules of Dividend Investing does not rank either Wells Fargo or Chase highly. Both businesses have extremely high volatility due to lackluster performance in the financial crisis (although Wells Fargo performed far better than Chase). Further, both businesses have barely managed to increase dividends over the last decade. Of the two, Wells Fargo is ranked higher due to its higher growth rate and lower payout ratio.