This post was written by Bob Ciura for Sure Dividend
The financial crisis devastated the U.S. big banks. Many of them, including Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM), slashed their dividends during the Great Recession. As a result, the banking industry is woefully under-represented on the list of Dividend Aristocrats, a group of companies in the S&P 500 that have raised dividends for 25+ years. You can see the entire list of Dividend Aristocrats here. There are several financial sector companies on the list of Dividend Achievers, a group of 271 stocks with 10+ years of consecutive dividend increases. You can see the full Dividend Achievers List here.
But again - no big banks on the list, only insurance companies, investment managers, and small regional banks. Big banks may be hard to trust, as many investors got burned by their massive dividend cuts. But the good news is, several big banks pay above-average dividend yields, and have returned to regular dividend growth.
This article will discuss three reasons why JPMorgan is a better bank dividend stock than Wells Fargo.
Reason #1: Business Overview
The climate for Wells Fargo and JPMorgan is decidedly different, even though they are nearly identical companies.
Wells Fargo received a $185 million fine because the company opened millions of accounts for its customers without their consent. It also resulted in the Chief Executive Officer being replaced. This adds an extra layer of uncertainty within the company's leadership structure. The situation tarnished Wells Fargo's brand, and made for a difficult year in 2016. Revenue increased 2.6% for the year, but earnings per share declined 3.2%, to $3.99. The results deteriorated as the year progressed.
Source: 4Q Earnings Presentation, page 8
Wells Fargo's fourth quarter earnings per share declined 6.8%. Not surprisingly, JPMorgan performed better than Wells Fargo in 2016.
JPMorgan's revenue and earnings per share increased 2% and 3%, respectively, for the year. Growth was due mostly to a 5% increase in net investment income. The company's core consumer & community banking segment grew average loans and deposits by 14% and 11%, respectively, in the fourth quarter. The U.S. consumer is gradually becoming healthier, which has benefited JPMorgan a great deal.
Source: 4Q Earnings Presentation, page 12
Other than auto loans, delinquencies across its loan portfolio have declined significantly over the past five years. This is particularly the case for home mortgages.
While Wells Fargo's performance deteriorated in the fourth quarter, JPMorgan's results improved. For example, JPMorgan's commercial banking revenue increased 12% and reached a company record of $2 billion.
For 2016, JPMorgan carried a Common Equity Tier 1 ratio of 12.2%, which indicates a sufficient level of capital and a strong balance sheet. By contrast, Wells Fargo had a Common Equity Tier 1 ratio of 10.7% at the end of the year. JPMorgan outperformed Wells Fargo in 2016.
Reason #2: Growth Prospects
Second, Wells Fargo's growth is likely to be stunted at least for 2017, and possibly longer, due to its fake accounts scandal from 2016. JPMorgan has better growth prospects, because it is in better position than Wells Fargo to capitalize on rising interest rates.
On March 15, the Federal Reserve raised the Fed Funds rate, to a target range of 0.75% to 1%. The Fed also stated its intention to hike rates three times in 2017. Higher interest rates increase a bank's net interest income, which is a huge portion of their overall profits. Rising interest rates boost profit margins, because income from long-term loans like mortgages and auto loans rises at a faster rate than interest paid on deposits.
Wells Fargo is the largest mortgage originator in the U.S. Under normal circumstances, this should have given it the advantage in a rising-rate environment. But Wells Fargo may not be able to capitalize because its brand image could still be impaired.
On the surface, Wells Fargo's loan metrics look good. Total loans outstanding rose 0.6% from the previous quarter, but the growth came from commercial loans.
Source: 4Q Earnings Presentation, page 12
Wells Fargo's consumer loans declined by $3.8 billion in the fourth quarter, due to lower consumer real estate, auto, and student loans. If consumer loans continue to fall, Wells Fargo may not see the full benefit of rising interest rates. On the other hand, as the nation's largest bank by assets, JPMorgan will be among the major beneficiaries of rising interest rates. It has a huge mortgage business of its own, which is getting a boost from falling charge-offs and loan losses.
Source: 4Q Earnings Presentation, page 15
JPMorgan is the second-largest mortgage originator and servicer in the U.S. Average mortgage loans were up 6.1% from the same quarter in 2015. In addition, JPMorgan's consumer banking business is a crown jewel, particularly because of its digital footprint. Debit and credit sales volumes increased 11% last quarter, year over year, and active mobile customers rose 16% to 26.5 million.
Reason #3: Dividends
Wells Fargo has a slight edge over JPMorgan when it comes to dividends, because of a higher yield. Wells Fargo stock yields 2.5%, compared with 2.1% for JPMorgan Chase. This should not be a difference maker for income investors, however, because dividend growth is an important consideration as well.
In 2016, Wells Fargo increased its dividend by just 1%. This was the right move, as Wells Fargo needed to spend more to initiate a new retail banking compensation program, and retrain its employees. Nevertheless, JPMorgan increased its dividend by 9.1% last year.
The lingering fallout from Wells Fargo's fake accounts scandal limited its dividend growth last year, and could continue to in 2017. Plus, Wells Fargo will likely continue its share repurchase program to help reverse the decline in earnings per share from 2016. Wells Fargo's share count was reduced by 1.5% over the course of 2016. As a result, Wells Fargo could pass along another low-single digit dividend increase in 2017.
Wells Fargo endured a tough year in 2016, and the company may not be entirely out of the woods yet. For JPMorgan, it's clear skies ahead.
If Wells Fargo stock were trading at a significant discount to JPMorgan, it could be the better pick based on valuation. But Wells Fargo and JPMorgan are similarly valued, each with price-to-earnings ratios of 14. As a result, JPMorgan's stronger fundamentals and higher dividend growth make it the more attractive stock of the two banking giants.