Before the open, JPMorgan Chase (NYSE:JPM) reported better than expected numbers though expectations weren't very high. While investors were sweating the quarterly numbers, the large bank has several buffers that cushion the downside reducing the risk in owning the stock.
The numbers continue my investment theme in the large bank sector of buying all dips in the stocks as interest rates only have one direction with limited downside. After a 4% rally in early trading to $62, JPMorgan Chase still offers an interesting value proposition though investors clearly missed the easy money when the stock traded down below $55 on several occasions to start 2016.
The Q1 numbers were better than expected, but the numbers were far below original expectations that sat above $1.50 per share when the year started. JPMorgan and the financial sector faced several headwinds in the quarter, but the numbers highlight how the bank can withstand hits now.
For the quarter, JPMorgan withstood higher provisions for credit losses and lower noninterest revenue while only seeing the EPS decline by 7%. The provisions due mainly to the energy and mining sector were up nearly $900 million or 90% from last Q1 while the noninterest revenue slumped $1.5 billion or over 10% from last year.
Source: JPMorgan Q116 presentation
Why the ability to take a couple of punches from the market matters is the ability to return capital to shareholders. The stock currently offers a 3% dividend yield. On top of that, JPMorgan regularly spends over $1 billion in share buybacks on a quarterly basis. The combination provides for a current net payout yield (dividend yield plus net stock buyback yield) of around 5.5%.
The bank spent $1.3 billion on stock buybacks during Q1 and recently got approval for another $1.9 billion in stock buybacks through Q2. The amount was on top of the $6.4 billion previously approved by the Fed last year.
The combination of withstanding some headwinds and still generating $5.5 billion in net income while being able to use that to return sizable amounts to shareholders makes the stock attractive going forward. As interest rates eventually rise and the energy and mining sector recover, the headwinds will turn into tailwinds. In that scenario, JPMorgan heads back towards earning $7 per share in 2017, as originally forecast when the year started.
The key takeaway for investors is the stock remains cheap at below 10x forward EPS estimates all while JPMorgan has proven that the bank can withstand a weak market. With a 5.5% yield, the stock remains a buy.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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