Investors have well over 5,000 publicly traded stocks on reputable U.S. exchanges to choose from. Unfortunately, finding the proverbial needle in the haystack can often prove difficult.
Continue Reading Below
But if you're looking for the world's most perfect stock, your search might end with national banking giant JPMorgan Chase (NYSE: JPM). Shareholders who've held throughout both the dot-com bubble and the Great Recession would have netted a nearly 790% return since the beginning of December 1983. Best of all, JPMorgan Chase's stock may not be anywhere near done.
Here are 10 reasons JPMorgan Chase might just be the world's most perfect stock.
Image source: Getty Images.
1. Monetary tightening is great news
Arguably the greatest reason to be in big bank stocks like JPMorgan Chase for the time being is the current monetary tightening from the Federal Reserve. After eight years of record-low rates, the Fed has raised its federal funds target by 25 basis points on three occasions since December 2015 as the U.S. economy has improved. Fed funds target increases have the effect of increasing the yields on interest-bearing assets, including variable loans, putting more money in JPMorgan's pocket without a need for the bank to do a thing.
According to the bank's first-quarter filing with the Securities and Exchange Commission, a 100-basis-point increase in short- and long-term rates, as of the end of March 2017, would generate $2.3 billion in added net interest revenue for the company. A 200-basis-point increase in short- and long-term rates, which is more or less in line with the Fed's long-term goal of a 3% fed funds rate, would add an estimated $3.8 billion in net interest revenue. While this isn't pure profit, the margin being generated from these interest rate hikes is very juicy for JPMorgan.
2. Its bread-and-butter businesses are on the upswing
Sometimes boring really is better when it comes to banks. Deposit and loan growth is what you might call the bread-and-butter foundation for all banks. As of the first quarter, JPMorgan Chase was generating pretty steady growth in both respects.
In the company's consumer and community banking operations, average deposits increased 11% to $622.9 billion year over year, while average loans rose 5% from the prior-year quarter. Similar strong improvements were seen in its asset- and wealth-management operations, where record average loan balances rose 7% year over year to $118.3 billion and average deposit balances increased 5% to $158.8 billion over the same time frame. If slow but steady wins the race, JPMorgan is likely at or near the front of the pack.
Image source: Getty Images.
3. Diversified organic growth from multiple operating segments
Another factor that investors in JPMorgan Chase are bound to appreciate is the bank's focus on organic growth. This isn't to say that the company doesn't have the funds to purchase its way into new markets via acquisitions, but that's not how this bank grows historically.
Look across its gamut of operating segments and you'll see pretty steady growth throughout. And in areas where income declined, other segments tend to step up and compensate for a single division's weakness. For instance, in Q1 we witnessed a decline in net income from its flagship consumer and community banking segment, likely a result of higher expenses and credit costs. However, corporate and investment banking income more than doubled to $3.2 billion, while commercial banking net income hit a record of $799 million, up 61% year over year.
Long story short, this is a well-balanced organic growth machine.
4. Cost-cutting provides an avenue to improve margin
Though a stronger U.S. economy has helped JPMorgan deliver solid organic growth as a whole, its management team isn't oblivious to the fact that prudent cost-cutting can also help improve margins.
JPMorgan Chase has actively been looking at ways to reduce its physical imprint (i.e., close branches) to save money. As of the end of Q1 2017, the bank had 5,246 branches, down 139 from the year-ago period, or about 3%. This is a continuation of a plan announced in 2015 to close about 300 branches, or 5% of its physical banks, by the end of 2016. Doing so was expected to reduce expenses by $2 billion, which is on top of the $3.2 billion JPMorgan had already cut from expenses between 2012 and 2014. In short, more cost-cutting should yield even better financial flexibility.
Image source: JPMorgan Chase & Co.
5. A strong mobile push
Another reason JPMorgan Chase has been actively reducing its physical presence is the rising popularity of mobile banking among the younger generation. Data released from the company back in 2015 showed that depositing money with a teller costs more than 20 times as much as depositing money via a mobile app -- $0.65 versus $0.03. Focusing on mobile gives JPMorgan a way to improve consumer convenience, boost engagement with the next generation of workers, and cut its long-term costs.
As of the end of the first quarter, the company had 27.26 million active mobile customers, which was up by more than 3.4 million, or 14%, on a year-over-year basis. As this figure rises, the bank's ability to market these consumers increases while costs decline.
6. It's well capitalized
Considering the capital crunch many financial institutions faced during the Great Recession, investors often keep a very close eye on how well funded today's banks are. When it comes to JPMorgan, there are few worries.
Once again referencing its Q1 report, the company ended the quarter with a Basel III leverage ratio of 12.4% and a Tier 1 capital ratio of 14.1%. Both figures are up by 70 basis points on a year-over-year basis. Having been more prudent with its capital since the recession, and cleaning up its loan portfolio over the past decade, has had a big impact on strengthening its financial flexibility and ensuring it has the capital to survive a pretty steep recession, should one occur.
Image source: Getty Images.
7. Relatively positive consumer loan trends
As is often the case with rising interest rates, JPMorgan has witnessed a modest uptick in its 30-plus-day credit card delinquencies and net charge-offs over the past two quarters. This is to be expected as indebtedness consumers struggle to adjust to higher variable credit card rates.
However, most aspects of JPMorgan's loan portfolio look great. Both home equity and residential short- and long-term delinquencies have been on a pretty steady decline over the past four years, while auto delinquencies and credit delinquencies are mostly stable since March 2013. Having a high-quality loan portfolio is important, because it means the bank doesn't have to set aside nearly as much in loan loss reserves.
8. Great Recession fines and settlements mostly in the rearview mirror
One of the bigger hindrances for banks since the Great Recession have been a flurry of fines and settlements derived from their mortgage and lending practices. Though JPMorgan avoided having to pay north of $60 billion in aggregate fines like its peer Bank of America, it still wound up handing over a pretty penny to regulators, including around $20 billion worth of fines and penalties in 2013 alone.
Here's the good news: JPMorgan's hefty fines are mostly in the rearview mirror. In January, the company agreed to pay $55 million to settle an investigation into whether it was charging certain borrowers higher interest rates than others, but $55 million is a far cry from the days where billion-dollar fines were seemingly the norm. What this means is investors are getting a cleaner look at the company's results, which is allowing for a more accurate valuation of the company.
Image source: Getty Images.
9. Shareholder yield
Despite looking to cut costs, JPMorgan Chase hasn't forgotten about its shareholders. The bank has done a good job rewarding investors through share buybacks and via dividend growth.
For instance, in June of last year the company announced a $10.6 billion stock repurchase program that'll run through the end of June this year. Remember, buying back stock reduces the total number of shares outstanding, which in turn can lift earnings per share and lower a company's P/E ratio, making it look more attractive to Wall Street and investors.
JPMorgan Chase has also lifted its quarterly dividend by a cumulative 32% ($0.38 to $0.50) over the past four years. This works out to a current yield of 2.3%, which is slightly above the average yield of the S&P 500.
10. An attractive valuation
And of course, JPMorgan is also attractive on a valuation basis.
The bank ended Q1 with a tangible book value (TBV) of $52.04, up nicely from the $48.96 in TBV reported in Q1 2016. Based on its recent closing price, it's valued at a little less than 1.7 times TBV. Typically, Wall Street doesn't worry about bank valuations (especially the valuations of superior performers) until they cross two times TBV. This leaves JPMorgan Chase's stock ample room to run higher and grow its TBV.
On a more nominal basis, it's valued at just 11 times next year's EPS and could see in the neighborhood of 10% EPS growth each year during the current monetary tightening cycle.
It's quite possible that JPMorgan Chase may be the world's most perfect stock.
10 stocks we like better than JPMorgan ChaseWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and JPMorgan Chase wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of May 1, 2017