JPMorgan Chase could lift its annual dividend to 70 cents per share and buy back 10% of its outstanding shares next year, according to an analyst who met with CEO Jamie Dimon last week.
In a note to clients on Monday morning, Matt O'Connor, who analyzes large cap bank stocks for Deutsche Bank, reiterated a buy rating on JPMorgan. He expects the stock to pick up in 2011, despite its recent "sluggish performance" due to revenue headwinds, mortgage issues and investors' impatience over JPMorgan's static dividend.
"The capital story has been disappointing given hopes for a dividend increase in 2010 never materialized and JPM wasn't allowed to repurchase meaningful amounts of stock," O'Connor said. "But this should change (mgmt believes in 1Q) when there's more clarity on capital and dividends and mgmt seems very eager to aggressively buy back stock at current levels."
Since mid-November, JPMorgan shares have traded at or below $40, a far cry from its 52-week high of $48.20.
The bank slashed its dividend to 20 cents per year in early 2009 after receiving bailout funds. Though JPMorgan has weathered the downturn better than its peers and has strong capital levels, it hasn't been allowed to return capital to shareholders in any meaningful way due to regulatory restrictions.
The Federal Reserve announced last month that the 19 largest banks will be able to increase dividends, pending an extensive review of their capital plans. The banks must submit those plans in January and Wall Street expects a handful, including JPMorgan, to pass easily.
O'Connor suggested that the results could be a "near-term catalyst" for JPMorgan shares. He also expects net interest income to increase during the second half of 2011 and hopes to see "less regulatory drag" as well. O'Connor also says that he expects JPMorgan to announce a 10% repurchasing plan in the first quarter and dividend hikes in both the first and third quarter, to reach a 70-cent-per-year payout by the end of 2011.
"Based on our discussions with banks, the (government) stress test seems to require much more detail from the top 19 banks than the previous one," said O'Connor. "However, required capital raises at these banks seem unlikely."
In another report on Monday, RBC Capital Markets analyst Gerard Cassidy indicated that other banks may be ready for dividend hikes as well. In addition to JPMorgan, Cassidy expects Capital One (COF), PNC (PNC), State Street (STT), The Bank of New York Mellon (BK), U.S. Bancorp (USB) and Wells Fargo (WFC) to announce dividend raises after the Fed results roll in. He thinks State Street and BoNY Mellon will announce the largest increases, due to high capital levels and minimal credit exposure.
"We believe with this stress test The Federal Reserve is sending a different message than the one it sent in 2009," says Cassidy. "The message with this stress test is one of strength. It is a signal to the marketplace that the largest U.S. banks are well capitalized and even in a stressed economic environment they are capable of paying a dividend. Additionally, it is a signal that the banking industry is getting back to normal."
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