JPMorgan Chase: 6.00% From This Preferred Stock IPO

|
About: JPMorgan Chase & Co. (JPM), Includes: JPM.PA, JPM.PF, JPM.PG, JPM.PH, JPMPRE
by: Arbitrage Trader
Summary

Overview of JPMorgan Chase's new preferred stock - JPM-C.

A brief look at the company.

Where in the context of all securities, issued by JPMorgan Chase, does JPM-C stands?

Comparison with the sector.

Comparison with the all preferred stocks, issued by a bank.

Introduction

In this article, we want to shed light on a new preferred stock issued by JPMorgan Chase & Co. (JPM). An interesting fact is that the company use this symbol, as it was the ticker symbol of an old issue that was redeemed on April 2, 2015.

Source: QuantumOnline.com

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B2 Filing by JPMorgan Chase & Co - the prospectus.

Source: SEC.gov

For a total of 74M shares issued, the total gross proceeds to the company are $1.9B. You can find some relevant information about the new preferred stock in the table below:

Source: Author's spreadsheet

JPMorgan Chase & Co. 6.00% Non-Cumulative Preferred Stock, Series EE (NYSE: JPM-C) pays a qualified fixed dividend at a rate of 6.00% and have a par value of $25. The new preferred stock is expected to be rated a 'BBB-' from Standard & Poor's and is callable as of 03/21/2024. Currently, the new issue trades above its par value at a price of $25.62 and has a 5.85% Current Yield and a 5.45% Yield-to-Call.

Here is how the stock's YTC curve looks like right now:

Source: Author's spreadsheet

The Company

JPMorgan Chase & Co. (JPMorgan Chase), incorporated on October 28, 1968, is a financial holding company. The Company is engaged in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, and asset management. JPMorgan Chase's activities are organized into four business segments, as well as a Corporate segment. The Company's segments include Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management. Its principal bank subsidiaries include JPMorgan Chase Bank, National Association (JPMorgan Chase Bank, N.A.), a national banking association, and Chase Bank USA, National Association (Chase Bank USA, N.A.), a national banking association that is the Company's credit card-issuing bank. JPMorgan Chase's principal nonbank subsidiary is J.P. Morgan Securities LLC (JPMorgan Securities), the United States investment banking firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally, as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. The Company's principal operating subsidiary in the United Kingdom is J.P. Morgan Securities plc, a subsidiary of JPMorgan Chase Bank, N.A.

Source: Reuters.com | JP Morgan Chase & Co

As it is the one of the most famous and the biggest US Bank, there is no need for a much in-depth presentation, so let's move further with the market opinion for the common stock, JPM:

Source: Tradingview.com

The yearly dividend paid by JPM has increased since the Great Recession from $0.20 in 2010 to $2.48 in 2017, which is an 1140% increase. With a market price of $104.35, the current yield of JPM is at 2.37%. As an absolute value, this means $8.3B yearly dividend expenses for the common.

In addition, the market capitalization of the company is around $353B, which makes JPMorgan Chase the largest 'Money Center Bank'.

Capital Structure

Below, you can see a snapshot of JPMorgan Chase & Co.'s capital structure as of its Quarterly Report in September 2018. You can also see how the capital structure evolved historically.

Source: Morningstar.com | Company's Balance Sheet

As of Q3 2018, JPM had a total debt of $334.76B ranking senior to the newly issued preferred stock. The new Series EE preferred stock rank junior to all outstanding debt and equal to the other outstanding preferred stocks, which total $27.76B.

The JPMorgan Chase Family

The company has 7 more outstanding preferred stocks, listed on the NYSE:

  • JPMorgan Chase & Co. 6.70% Dep Shares Non-Cumulative Preferred Stock, Series T (NYSE: JPM-B*)
  • JPMorgan Chase & Co. 6.30% Dep Shares Non-Cumulative Preferred Stock Series W (NYSE: JPM-E)
  • JPMorgan Chase & Co. 6.15% Dep Shares Non-Cumulative Preferred Stock Series BB (NYSE: JPM-H)
  • JPMorgan Chase & Co. 6.125% Dep Shares Non-Cumulative Preferred Stock Series Y (NYSE: JPM-F)
  • JPMorgan Chase & Co. 6.10% Dep Shares Non-Cumulative Preferred Stock Series AA (NYSE: JPM-G)
  • JPMorgan Chase & Co. 5.75% Dep Shares Non-Cumulative Preferred Stock Series DD (NYSE: JPM-D)
  • JPMorgan Chase & Co. 5.45% Dep Shares Non-Cumulative Preferred Stock, Series P (NYSE: JPM-A)

Source: Author's database

As the company announced that it will redeem on March 1, 2019, all of its outstanding shares of its 6.70% Non-cumulative Preferred Stock (JPM-B), we will compare the newly issued Series EE Preferred Stock with the rest of JPM's preferred stocks, and we can see that it is fairly priced with its closest "brother", the previously issued JPM-D and it is better than the older JPM-G, JPM-F, and JPM-H. However, this is at the expense of a longer period of time to its call date. A better idea of the peer group yields can be found in the following bubble charts:

By Years-to-Call and Yield-to-Call

Source: Author's database

By Yield-to-Call and Current Yield

Source: Author's database

Furthermore, there are a plethora of corporate bonds issued by the company and the picture below presents only a tiny part of it:

Source: FINRA

For my comparison, I choose a fixed-rate bond that matures almost the same as the call date of JPM-C, JPM4345217.

Source: FINRA | JPM4345217

JPM4345217, as it is the FINRA ticker, is rated an 'A-', has a maturity date of 03/22/2024, and is yielding at 3.5%. This should be compared to the 5.45% Yield-to-Call of JPM-C, but when making that comparison, do remember that JPM-C's YTC is the maximum you could realize if you hold the preferred stock until 2024. This result is a yield spread of around 2% between the two securities, which can be explained by the higher rank in the capital structure and the higher credit rating of the Bond.

Sector Comparison

The chart below contains all preferred stocks in the "Money Center Banks" sector (according to Finviz.com) that pay a fixed dividend rate and has a par value of $25. It is important to take note that all of these preferred stocks are eligible for the 15% federal tax rate.

The Yield Curve, presented by all non-callable issues that trade above its par value:

Source: Author's database

All preferred stocks by their Yield-to-Call and Current Yield:

Source: Author's database

Take a closer look at the main group:

Source: Author's database

The Banking Preferreds

The chart below contains all preferred stocks issued by a bank with a par value of $25 that have qualified fixed dividend rate.

The Yield Curve, presented by all non-callable issues that trade above its par value:

Source: Author's database

All preferred stocks with a positive Yield-to-Call by their Yield-to-Call and Current Yield:

Source: Author's database

Again, the main group:

Source: Author's database

All 'BBB-' Preferred Stocks

The last chart contains all preferred stocks that pay a fixed dividend rate, have a par value of $25, a 'BBB-' Standard & Poor's rating and a positive YTC.

Source: Author's database

A closer look:

Source: Author's database

Redemption Following a Capital Treatment Event

At any time within 90 days after a capital treatment event, and at the option of our board of directors or any duly authorized committee of our board of directors, we may provide notice of our intent to redeem the Preferred Stock in accordance with the procedures described below, and we may subsequently redeem, out of assets legally available therefore, the Preferred Stock in whole, but not in part, at a redemption price equal to $10,000 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends on the shares of the Preferred Stock called for redemption up to the redemption date. Subject to irrevocably setting aside or depositing funds necessary for redemption, dividends will cease to accrue on such shares on the redemption date, without accumulation of undeclared dividends.

For purposes of the above, "capital treatment event" means the good faith determination by us that, as a result of any:

  • amendment to, or change or any announced prospective change in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective after the initial issuance of any shares of the Preferred Stock;
  • proposed change in those laws or regulations that is announced or becomes effective after the initial issuance of any shares of the Preferred Stock; or
  • official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced or becomes effective after the initial issuance of any shares of Preferred Stock,

there is more than an insubstantial risk that we will not be entitled to treat an amount equal to the full liquidation amount of all shares of Preferred Stock then outstanding as "additional Tier 1 capital" (or its equivalent) for purposes of the capital adequacy guidelines or regulations of the appropriate federal banking agency, as then in effect and applicable, for as long as any share of Preferred Stock is outstanding. Redemption of the Preferred Stock is subject to our receipt of any required prior approvals from the Federal Reserve Board or any other regulatory authority.

Source: 424B2 Filing by JP Morgan Chase & Co

Use of Proceeds

Unless otherwise described in the applicable prospectus supplement, we will use the net proceeds we receive from the sale of the securities offered by this prospectus and the applicable prospectus supplement for general corporate purposes. General corporate purposes may include the repayment of debt, investments in or extensions of credit to our subsidiaries, redemption of our securities or the financing of possible acquisitions or business expansion. We may invest the net proceeds temporarily or apply them to repay debt until we are ready to use them for their stated purpose.

Source: 424B2 Filing by JP Morgan Chase & Co

S&P preferred stock index

With the current market capitalization of the new issue of around $1.9B, it is a potential addition to the S&P US Preferred Stock iShares Index. If the average monthly volume of JPM-C after its first six months on the NYSE is more than 250,000, it would be eligible for inclusion in the S&P U.S. Preferred Stock Index. With fewer than six months of trading history, issues are evaluated over the available period and might be included if available trading history infers the issue will satisfy this requirement.

However, it must be noted that the main benchmark, PFF, which is the ETF that seeks to track the investment results of this Index, is in progress of changing its investment objective. The fund is expected to change the underlying index, passing through a Transition index ("ICE Exchange-Listed Preferred & Hybrid Securities Transition Index") during the period from February 1, 2019, to October 31, 2019, and after that will track the "ICE Exchange-Listed Preferred & Hybrid Securities Index". Since the requirements for addition of the New Index are much likely the same as the old one (with the difference that the New Index will also include notes), with a high probability JPM-C will be included to the PFF holdings.

Conclusion

This is an informational article about the new preferred stock, JPM-C. With this kind of articles, we want to keep you in touch with all new preferred stock and baby bonds IPOs.

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.