I Believe JPMorgan's Yield Will Increase, But Not In A Good Way

|
 |  About: JPMorgan Chase & Co. (JPM)
by: Abba's Aces

Summary

The decreasing return on equity ratio continually troubles me.

Settlements and lawsuits from the financial crisis continue to haunt the company.

All that said, the stock is inexpensively valued with respect to 2015 earnings estimates.

The big banks continue to be haunted by the ghosts of the financial crisis and still have many investors concerned. Citi (NYSE:C) has been rejected yet again to be able to return additional capital to shareholders, Bank of America (NYSE:BAC) was just barely allowed to increase its capital return to shareholders earlier this week, and JPMorgan continues to have lawsuits/settlements chasing it down.

Having said that, it's only fair to mention with respect to residential mortgage backed securities, mortgage trustees are asking for approval of a $4.5 billion settlement from the court in relation to JPMorgan RMBS'. Institutional investors such as BlackRock want the court to approve the settlement because the home loans were defective. The financial crisis continues to be a reoccurring problem for the financial institutions and this probably won't be the last settlement or lawsuit we'll hear about for the company.

On a more neutral note, individuals at America's big banks need to communicate with each other effectively and quickly for the purpose of communicating information to execute trades. In other industries employees sit at work and communicate through Microsoft Communicator, but in the financial world the equivalent is Bloomberg's trading and news terminal. Bloomberg's terminals however cost $20,000 per year to keep up, hence why a few of the big banks including JPMorgan (NYSE:JPM) are looking to buy a stake in competitor Perzo as an alternative to Bloomberg.

Perzo currently acts as an open-source application and is free, which would bring down costs at the banks significantly. So far JPMorgan has only signed a non-disclosure agreement and received term sheets, but that's it. This is just one of the many efforts the bank is trying out to cut costs as smaller trading volumes and higher regulations have been anchoring revenue. The Bloomberg system is very much like the Apple ecosystem, once you get sucked in, you can't leave. Only time will tell if Perzo will supplant Bloomberg's terminals.

Let's discuss some of the good at the company now that we've discussed some of the bad that has been taking place. From a revenue stream perspective, JPMorgan has been paid handsomely this year for their part in bringing IPOs to life for private equity firms. Investment banks such as JPMorgan have been paid $1.3 billion so far this year compared to the $498 million paid out last year at this time for their services. JPMorgan has the second highest share of fees from private equity companies with an 8.2% clip, trailing Goldman Sachs (NYSE:GS) which has an 11.1% share of the wealth. Though this is a small portion of the company's business, JPMorgan sits at the top of the list of banks to bring companies public as it has a rich history of doing so.

Though the company has taken its fair share of punches since the financial crisis and will probably continue to do so, it is a pretty well run company, relatively speaking; relative to the banking industry that is. The stock has dropped from $60 per share in early April to the mid-50's at this moment, but continues to be inexpensive based on 2015 earnings estimates. Analysts expect the stock to make $5.96 per share in all of 2015 versus $3.87 per share it has made in the last twelve months and the $5.51 estimate for 2014.

Earnings growth is still a little low for my taste, but then again, the banks which came out of the financial crisis relatively unscathed are all showing earnings increases for 2015 less than 10%. The one important financial metric I follow, return on equity, has decreased at JPMorgan from between the first and second quarters of this year. This was due to the average equity value increasing dramatically because net income actually increased by 13%. I'd like to see this value stabilize or increase the next time the company reports earnings.

Conclusion

I continue to believe that this is a pretty good banking stock but the return on equity continues to decrease as the year continues on, and I don't like that trend. On the dividend side of the situation, the yield continues to go up as the share price continues to come down. I'm hesitant on buying some more shares in the stock right now and will more than likely wait till it gets a little closer to a 3% yield.

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, C, BAC. 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.