Investment Alert: Buy JPM Under $130/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
Arguably there are $2.38 trillion reasons to buy JP Morgan. The bank reported recently that it had that amount in deposits at the end of the most recent quarter, a rise of 2% over the same quarter last year. It also represents about a trillion more in deposits than rival Citigroup.
What the increase points to is a flow of capital into JP Morgan on the back of consumer concerns from the fallout and failure of Silicon Valley Bank. That in turn should lead to significantly higher net income according to JP Morgan’s management team.
And still there are other reasons to buy the bank; the dividend is a primary one.
- JP Morgan’s net interest income is expected to soar by over 11x to $81 billion.
- Jamie Dimon’s firm offers a dividend yield of 2.88%.
- The fair value for JP Morgan is $152 per share, which is 10% higher than the current share price.
Net Income Set To Soar 11x at JP Morgan
A funny thing happened when JP Morgan reported recently. Management guided that net interest income would soar by over 11x to $81 billion in 2023 from the previous estimate of $7 billion. That is a shocking increase and it begs the question, why?
Let’s do some back of the envelope math to crunch some numbers. Disclaimer: this is REALLY rough math, but will suffice to highlight the tailwinds JP Morgan is experiencing.
Let’s assume ALL $2.38 trillion in deposits are in checking accounts earning customers 0.1% annually while JP Morgan can place them in 3 month treasuries yielding 5.067% right now. JP Morgan then earns the spread, which is $132 billion dollars.
Now in practice the financials aren’t that rosy. Deposits are spread across checking and savings accounts as well as certificates of deposit and money market accounts. 3 of those 4 accounts are higher yielding to customers than checking accounts so the amount earned by JP Morgan is less than the $132 billion calculation. Still, you can see management believes the figure net of costs to be around $81 billion, an astonishing 11x higher than their previous forecast.
Dividend + Valuation Compelling
That massive levels of deposits at JP Morgan propel it way up the safety curve as an investment and, in our view, transforms it into a low risk holding. For shareholders, though, it gets better. The bank still pays out a yield of close to 3%. To be precise, the yield currently is 2.88%, an attractive level for an income-oriented investor.
But wait, there’s more.
When we ran the numbers on JP Morgan the fair value for the firm sat at $152 per share, a full 10% higher than where the share price sat at the time of research. You might think this isn’t especially attractive. But in a world where Silicon Valley Bank can essentially shutter its doors in the blink of an eye, the price for stability is a reasonable upside and solid dividend.
If you want higher reward, you’ll need to venture out into higher risk territory. First Republic has arguably as much as 58% upside but, oh, the risks are high dabbling in those shares.