Banking & Finance

Jamie Dimon Readies J.P. Morgan Investors for Much Larger Dividends Ahead

Jamie Dimon, chief executive and chairman of JPMorgan Chase & Co. (NYSE: JPM), hosted the banking giant’s 2015 investors day on Tuesday. While there were many comments defending the bank’s structure and effort to thwart breakup talk, the reality is that many investors may cheer the dividend and shareholder treatment comments the most.

First and foremost, J.P. Morgan said that any form of breakup that has been hinted at by outsiders would come at a cost far too high. We wrote about plans to close branches and the like, but investors may stay focused on the dividend hopes ahead.

Another aim is that Chase and J.P. Morgan will drive certain bank deposits away — yes, they want to lower their deposit base! The reason is that some money is too hot — it comes in and goes out in such a manner that the bank cannot count on it being a solid base for the bank. Another issue is that holding deposits requires keeping additional reserves aside.

So, what did Dimon say for investors about the stock and the return of capital?

Dimon actually said that he likes the bank’s stock at the current price. And the biggie: Dimon wants to grow J.P. Morgan’s dividend payout ratio to 50% from 30%. Before you expect that this means J.P. Morgan will raise the dividend by two-thirds, you might need some patience and tempering of expectations. The reason why is simple: regulators likely will not allow that, not immediately, or even over a short time, at least.

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Dimon noted that most regulatory rules will have been finalized in the next two years and also that many legal costs are likely to end then as well. Another thing that investors probably already assumed is that J.P. Morgan has no chance of making acquisitions inside the United States. Dimon said that regulators do not want the bank to be larger. Dimon talked about organic growth opportunities, but also left the door open to looking at opportunities for M&A overseas.

So, what would it mean taking the dividend payout ratio to 50% from 30%? J.P. Morgan’s dividend is $1.60 per share on an annualized basis now, and that generates roughly a 2.65% yield. If you just use straight line math, without trying to factor in things such as preferred shares and buybacks and other payments, then the common stock dividend could rise by more than $1.00 — and it could be a yield of closer to 4.4%.

This is potentially huge news for investors looking for higher dividends and return of capital from the major banking giants. That being said, or said again, just do not under any circumstances expect that this means that rapid-fire dividend hikes are coming without some pushback from regulators.

The Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) is scheduled to be out in March. At that point we will know by how much the regulatory powers that be are in favor of banks raising their dividends and how much they are approving for share buybacks.

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Here is what Fitch Ratings had to say on the matter of dividends and buybacks in its recent review ahead of the CCAR:

Of the eight US G-SIBs (Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo), several may begin to tilt their capital requests towards share repurchases rather than dividend increases ahead of the 2019 effective date for the capital surcharge proposal. The optionality of share repurchases would provide additional capital flexibility in future years, relative to scheduled dividends.