High-Yielding JPMorgan Needs To Yield More For Me Then I'll Consider It

Jul.23.14 | About: JPMorgan Chase (JPM)

Summary

I believe the stock to be inexpensively valued on 2015 earnings estimates.

The financial efficiency ratios have decreased from the last time I looked at the stock.

The risk/reward ratio is a bit high for my taste right now.

The last time I wrote about JPMorgan Chase & Co. (NYSE:JPM) I stated, "Due to the stock being overbought, 2015 earnings estimate cuts, and declining return on equity, I will not be pulling the trigger here right now and will choose to reevaluate if the dividend yield gets closer to 3%." Since the article was published the stock has increased 0.59% (but was at a low of 4% drop) versus the 1.16% gain the S&P 500 (SPY) posted. 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.

On July 15, 2014, the company reported second quarter earnings of $1.59 per share, which beat the consensus of analysts' estimates by $0.30. In the past year, the company's stock is up 3.7% excluding dividends (up 6.38% including dividends) and is losing to the S&P 500, which has gained 16.64% in the same time frame. Since initiating my position back on May 21, 2013, I'm up 2.27% inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the financial sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 15.05, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 9.78 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $5.95 per share and I'd consider the stock inexpensive until about $89. The 1-year PEG ratio (1.68), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 8.97%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

13Jan14

58.49

13.11

9.75

6.00

90

0.36

35.99

01Apr14

60.67

13.88

9.57

6.34

95

1.77

7.84

10Jun14

57.90

14.26

9.71

5.97

90

1.29

11.02

21Jul14

58.24

15.05

9.78

5.95

89

1.68

8.97

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Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.75% with a payout ratio of 41% of trailing 12-month earnings while sporting return on assets, equity and investment values of 0.6%, 7.3% and 7.5%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.75% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 4 years. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

13Jan14

2.60

34

1.0

11.8

6.7

01Apr14

2.64

37

0.9

11.5

7.1

10Jun14

2.76

39

0.9

10.8

7.5

21Jul14

2.75

41

0.6

7.3

7.5

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Technicals

Click to enlarge

Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around in middle-ground territory with a current value of 60.47. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars beginning to flatten out in height. As for the stock price itself ($58.24), I'm looking at $58.48 to act as resistance and the 20-day simple moving average (currently $57.11) to act as support for a risk/reward ratio which plays out to be -1.94% to 0.41%.

The Whale Shares

The company recently awarded CEO Jamie Dimon options for two million shares which were worth about $36 million at the time of issuance. In 2008, Mr. Dimon's compensation package included these options, but weren't exercisable till January 2013. However, the board decided to defer the options until now due to the bank's $6.2 billion London Whale losses. The board has reassessed the deferment of the vesting but decided against it, making the shares exercisable as of today.

One Foot In, One Foot Out

The company is supposedly in advanced discussions to sell roughly $2.25 billion (or 50%) worth of its investment portfolio of One Equity Partners, its buyout branch. Prospective purchasers of the stake are Lexington Partners and AlpInvest Partners. Details of how much the buyers would pay for the stake are still not known, but equivalent fund stakes have been selling close to their NAV.

Conclusion

Investors really loved the most recent earnings report by the company, but I'm still not convinced that it's out of the woods yet. Earnings and revenues were less than the prior year, which I wasn't too happy about, but the company may have hit a pivot point as both earnings and revenues increased from the previous quarter. Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates but fairly valued on short-term earnings growth expectations. Financially, the dividend is pretty good and has room to grow in the future; however, the financial efficiency ratios have decreased from the last time I reported. On a technical basis the stock seems to be getting tired and the risk/reward ratio looks to be a bit high right now. I'm going to wait on buying shares right now until the earnings pop cools off.

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!

Disclosure: The author is long JPM, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.