JPMorgan Chairman and CEO Jamie Dimon. Image source: JPMorgan Chase.
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There are two conflicting trends that JPMorgan Chase (NYSE: JPM) CEO Jamie Dimon is presumably watching closely. At the same time that his bank and others are using buybacks to return a substantial amount of capital to shareholders, bank stock prices are soaring. In light of Dimon's past comments on buybacks, one of these will soon have to give.
Background on buybacks
There's no question that buybacks are an effective way for JPMorgan Chase, or any company for that matter, to return excess capital to shareholders. Yet, if stock is bought back at too high a price, which tends to be the rule and not the exception with most banks, then doing so destroys shareholder value.
Dimon made this point at the Goldman Sachs U.S. Financial Services Conference earlier this month. Asked whether JPMorgan's surging stock price has changed his thought process on the bank's ongoing buybacks, Dimon answered:
I've always had an issue about stock buybacks. ... If you're forced to buy back stock and the stocks are high, you shouldn't be doing that with your capital.
So we will be making a determination at one point: when is it time to stop buying back stock? And will we make public or not?
I don't know because that's not something that you want to share with people on the other side of that trade. But Warren Buffett did. Warren Buffett came out and said, 'I'm a buyer at 120% of tangible book value.'
We're still buying back.
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Dimon's past comments on buybacks
This isn't the first time Dimon has expressed reservations about share repurchases. Indeed, he dedicated a full page of his 2011 shareholder letter to the topic.
"Our appetite for buying back stock is not as great (of course) at higher prices," he wrote. He then proceeded to explain why it remained an attractive option for JPMorgan Chase at the time, though he assured investors that "the Board will continuously reevaluate our capital plans and make changes as appropriate but will authorize a buyback of stock only when we think it is a great deal for you, our shareholders."
JPMorgan Chase bought back $9 billion worth of stock that year at an average price of $37.35 a share. That equated to an 11% premium over the bank's tangible book value per share, which averaged out to $33.69 over the four quarters in 2011.
Fast forward to today and JPMorgan Chase's stock is trading for $86 a share. Its tangible book value per share at the end of the third quarter, meanwhile, was $51.23. This means that JPMorgan Chase is currently buying back stock at a nearly 70% premium to its tangible book value per share.
That's pretty pricey. So much so, in fact, that investors would be excused for wondering how much longer JPMorgan Chase will continue to return capital in this way.
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