JPMorgan (NYSE:JPM) has long been perhaps the best banking franchise our country has to offer. I've been very bullish on JPM for a variety of reasons including its diverse business, sustained profitability and its world class CEO. The common stock also offers a very nice dividend in addition to the potential for upside but in today's frothy market, some income investors are perhaps a bit leery of taking the risk of owning bank stocks. However, if you are an income investor that wants significantly reduced volatility but significantly higher income, you can still own a JPM issue without owning the common. In this article I'll highlight one of JPM's newer preferred stock offerings to see if it may be a fit for your portfolio.
The issue in question here is Series W preferred stock JPM issued last year. The Series W is a non-cumulative, traditional preferred stock. This means that JPM is actually under no obligation to ever make dividend payments on this preferred. Non-cumulative preferreds are generally less desirable than cumulative preferreds - issues which companies are obligated to make dividend payments on - but non-cumulative is the standard in the financial world. JPM has always issued non-cumulative preferreds like its competitors so this condition isn't unusual. In addition, the punishment from investors over missing a preferred dividend payment would be so great that I can't see a plausible scenario where it could actually happen. JPM would literally need to be on its death bed before missing a preferred payment; such would be the negative reaction from the capital markets.
I mentioned the Series W is a traditional preferred stock and what that means is that the preferred has no stated maturity date. A true preferred stock is perpetual in nature and this one fits that bill. That means that if JPM never calls the preferred, it will exist "forever".
Speaking of calling the preferred, JPM built in a provision where it can buy back some or all of the preferred at its full issue price beginning in September of 2019. This is also a standard provision for preferred stocks - the option to repurchase five years after issue date - so I wouldn't read into this provision too much. We have no way of forecasting whether or not JPM will want to call this issue in 4.5 years so it's just something to be aware of. If the issue does get called the price will be $25 regardless of where the preferred is trading at that time.
Speaking of $25, this issue trades as a depositary share that represents 1/400th of the actual Series W preferred. The effect is the same as owning the preferred directly but the depositary shares offer substantially increased liquidity and access for smaller investors. The depositary share is also traded on the NYSE so it is easily accessible to any brokerage.
The depositary share pays quarterly dividends that amount to $1.575 annually per share, good for a coupon yield of 6.3%. The depositary, however, has traded up since its issue and is now worth just over $26 as I write this. That means the current yield on the Series W is slightly less than the coupon at just over 6%. That's still a terrific yield in today's market and represents more than double the common stock's yield.
One note of caution is that with any fixed income issue, the prospect of rising rates will likely send the price of fixed income instruments down, all else equal. The reason is because as rates rise, fixed income instruments become less attractive at current prices and thus, must trade down to make their yields attractive once more as rates reset higher. I don't claim to know when rates will rise but it's something you must understand before purchasing a preferred or any other fixed income issue.
Overall the Series W offers investors a low volatility way to collect a 6%+ yield from perhaps one of the safest banks in the world. The non-cumulative dividends aren't an issue in my view and the quarterly dividends allow for regular income. The yield is also three times the broader market and two times what JPM common shares pay so you are being rewarded. Rising interest rates could prove problematic but for those needing current income, the Series W could be a great choice as a way to capitalize on JPM's strength.
Disclosure: The author is long JPM.
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.