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Big U.S. banks have earned very different reputations among investors and the public at large. Even though many Americans still blame large banks like Wells Fargo (NYSE: WFC) and JPMorgan Chase (NYSE: JPM) for helping to set the stage for the 2008 recession and financial crisis, those shareholders who stuck out the hard times have been rewarded for their patience and discipline, as the stocks have rallied to hit new all-time record highs. Both Wells and JPMorgan have done particularly well, outpacing many of their big-bank peers, but investors looking at the two stocks want to know which is the better choice for their portfolios right now.
Let's take a closer look at how Wells Fargo and JPMorgan Chase have fared lately based on some popular measures of success, and then you can decide which one is more appropriate for your investing needs.
Stock performance and valuation
After a rocky period of underperformance, the financial sector has finally started to show signs of life in recent months. Still, the returns that big banks have given shareholders over the past year are mixed. JPMorgan Chase has risen by 7% since August 2015, but Wells Fargo has actually lost 7% over the same period.
Even with the disparate performance, though, both stocks still look relatively inexpensive using traditional valuation measures. Looking at earnings, JPMorgan Chase carries a trailing multiple of 11 times earnings, which is slightly less than the earnings multiple of 12 for Wells Fargo. Even taking future expectations into account, JPMorgan still retains a slight advantage, weighing in at about 10.5 compared to 11.5 for Wells.
The premium investors have assigned to Wells Fargo is even more obvious in the relationship of its share price to its book value. Wells trades at a more than 35% premium to its book value, compared to just a 5% premium to book value for JPMorgan. With several big banks trading at discounts on a price-to-book basis, both of these banks look a bit pricy by this metric. But in many ways, higher price-to-book ratios reflect greater confidence in the assets on the banks' balance sheets. JPMorgan has a slight valuation advantage compared to Wells.
It has taken bank stocks a long time to get their dividends back to where they were prior to the financial crisis. Yet even as some of their peers struggle to get permission to boost their payouts, both Wells and JPMorgan have restored their dividends to healthy levels. JPMorgan carries a current dividend yield of 2.9%, which is just less than the 3.1% Wells pays.
In terms of dividend growth, though, JPMorgan has been more aggressive. The company just boosted its dividend by 9%, paying $0.48 per share and representing a nearly tenfold increase from the nickel per share it was required to pay in the aftermath of the financial crisis. In addition, the bank also expects to make massive stock buybacks over the next year, taking advantage of the Fed's positive assessment of its capital plan.
By contrast, Wells only gave investors a half-penny dividend increase this year, and in its most recent quarterly conference call, Wells noted that its current payout ratio is 62%. The company is trying to keep its payouts in a range between 55% and 75%. However, CEO John Stumpf strongly hinted that future dividend increases could rise. On the other hand, he also said buybacks are important, and shareholders should expect a combination of both. Overall, the two stocks have similar profiles on the dividend and capital-return front.
Growth prospects and risk
What has distinguished strong banks from weak ones is their ability to bounce back from adversity, and both Wells and JPMorgan have done a good job of doing that convincingly. However, it hasn't come without struggles. Wells Fargo's second-quarter financial report included a slight drop in net income, with the bank facing the difficult interest rate environment that has held back its ability to generate more net interest income. However, loan growth has been impressive, and returns on equity and assets have been well above its peer group's performance. Challenges in the energy sector have forced Wells to boost its loan-loss provisions, but even though Wells' efficiency ratio has remained higher than it would like, the bank is still working hard to keep costs down and its bottom line up.
JPMorgan Chase gave investors an even brighter view of its current situation. The bank counted record consumer deposits as well as strong credit card sales gains and loan growth. CEO Jamie Dimon pointed to the mortgage and commercial real estate areas as particularly important for JPMorgan's recent success, and the company has also benefited from more stable financial markets. JPMorgan has much more exposure to the investment banking side of the business than Wells Fargo does, and that finally started working in JPMorgan's favor after several quarters of uncertainty due to the volatile market environment.
Overall, both Wells Fargo and JPMorgan Chase are attractive stocks that could both benefit if the recovery in the financial sector continues. JPMorgan's slightly lower valuation, higher dividend growth prospects, and broader exposure to growth gives it a slight edge over Wells Fargo, but both stocks have the potential to generate strong returns going forward.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.