by Larry Gellar
JPMorgan Chase (JPM) has had a pretty good run over the past few months, and there are a number of recent events that should work in this stock's favor going forward, such as a reasonable dividend, strong fundamentals, and lackluster competition. In this article, I will focus on the reasons why I believe JPMorgan will enjoy above-average gains in the near future.
As would be expected, JPMorgan is continuing to make terrific decisions in regard to its personnel. The bank just promoted Matthew Biben to general counsel for its consumer businesses, and this is an important move to safeguard the company from future litigation. Armed with his previous experience at JP Morgan's mortgage operations, Mr. Biben certainly appears to be the right choice for this open position.
JPMorgan's board of directors is also in the midst of a change, and this too should be looked upon as a favorable development. While William H. Gray III and David C. Novak have decided to not run for re-election, Timothy Flynn is one strong choice being put up for nomination. As a previous chairman of KPMG International, Mr. Flynn's experience with finance and risk management figures to be enormously beneficial.
While these two human resource developments alone have the power to move JPMorgan higher, a recent product launch should also have investors excited. Indeed, a new technology called Alternative Investment Reporting will allow fund managers to have a better idea of what is happening with their non-traditional investments. Needless to say, Alternative Investment Reporting isn't huge news, but investors can still take it as a sign of JPMorgan's success with its varied businesses.
In fact, yet another business that JPMorgan Chase is having success with is its credit cards. This has drawn the ire of American Express (AXP), and American Express Vice Chairman Ed Gilligan even made a specific reference to Chase's ability to compete in this field. If executives from other companies are taking notice, investors probably should as well.
JPMorgan has also had a couple of negative headlines lately, but these shouldn't be particularly concerning. One issue is the departure of Piyush Gupta, who worked as the head of fixed income and debt capital markets in India. With his role now being split into work for three different people, there could be a bit of an adjustment period. On the other hand, JPMorgan's bond business in India isn't huge, so I don't foresee this having a significant impact on profits. Another story worth keeping an eye on is problems with Chase's web site. Customers were unable to access the web site during certain times in the past few days, which meant that JPMorgan Chase had to abandon the relevant late fees. Once again, this story shouldn't have a big impact on JPMorgan Chase's profits.
JPMorgan is a strong investment on its own merits, but the stock price may also benefit from the blunders of its competitors. For instance, Bank of America (BAC) recently released its annual letter to shareholders, which was quite revealing of its troubles. The infamous $8.5 billion Countrywide settlement still isn't final yet, and Bank of America has set aside $16 billion to deal with future mortgage litigation. Regardless, many analysts are skeptical that these reserves are enough.
Bank of America's stock price has been beaten down by the seemingly endless litigation, but there are other issues that make this stock a dangerous pick. While CEO Brian Moynihan's salary didn't change between 2010 and 2011, the stock awards part of his compensation increased by over $6 million. While the bank has returned to profitability, Bank of America's immense amount of unresolved issues make this a mind-boggling decision. Admittedly, JP Morgan CEO Jamie Dimon is compensated even more, but Mr. Dimon's management during the financial crisis has been significantly more successful.
Meanwhile, JPMorgan's other competitors are perhaps better off than Bank of America but still struggling with issues of their own. For instance, Citigroup (C) surprisingly failed the recent stress test administered by the Federal Reserve, and the issue could be Citigroup's loan portfolio. While information about the bank's loans isn't publicly available, this seems to be the biggest problem since it is one of Citigroup's riskiest asset groups. While CEO Vikram Pandit had previously mentioned raising the dividend, it appears that Citigroup will have some work to do before such a move is possible.
Speaking of dividends, JPMorgan offers an attractive dividend yield of 2.6%. This can help retirees bring in additional income, and in my opinion, this dividend can be considered very safe by investors. For the year 2011, JPMorgan brought in $32.035 billion of cash, and $95.932 billion of operating cash inflow played a big role in that. Additionally, there are other numbers that make JPMorgan look appealing right now. The price to earnings ratio of 10.26 is pretty low considering how well this bank is run. Barclays (BCS), with its notable European exposure, and Citigroup, with its capital problems mentioned above, have only slightly lower price to earnings ratios of 10.16 and 10.17 respectively. Furthermore, JPMorgan's operating margin of 36.24% is impressive, compared to 13.37% for Bank of America, 26.38% for Barclays, and 22.01% for Citigroup.
Clearly, there are a number of reasons why investors should consider JPMorgan right now. Most of the recent headlines have gone in the bank's favor, and the company's finances appear to be in good shape. A decent dividend along with poor competition should make JPMorgan the top bank stock for investors to buy right now. Of course, all bank stocks will depend heavily on the economy going forward, but Jamie Dimon does appear to be optimistic in that regard.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.