JPMorgan Chase is among the first companies mentioned by analysts and investors when discussing which financial firm will be the first to pay a dividend once regulators give the TARP-stained sector the OK to deploy capital to shareholders once again. But the firm may declare a buyback instead to send a message about how cheap its shares are, according to an analyst fresh off a meeting with CEO Jamie Dimon.
“Given Jamie’s confidence in capital levels and earnings power, we got a strong sense that management and the Board are seriously considering favoring a big buyback over a big dividend,” said respected banking analyst Glenn Schorr of Nomura Equity Research, in a note. “Considering our positive near-term capital markets outlook for the company and the fact JPMorgan trades at just 0.9x book and 1.4x tangible book, we agree and think a buyback is a better use of capital at this time.”
JPMorgan has led the banking sector higher this month, up more than 7 percent, on the hope that a parade of dividend payouts are coming after the Federal Reserve hinted it may ease restrictions instituted against the industry during the credit crisis.
In the past, dividends played a key part in evaluating financial stocks, especially for slower growing supermarket banks, but this time around banking chiefs like Dimon may believe a stronger message could be sent by a monster buyback indicating the shares are being undervalued by the market.
“The stock doesn’t trade on a dividend yield, so they won’t get much value in the market for that dividend,” said Karen Finerman, President of Metropolitan Capital Advisors. “If they buy back stock, that's very accretive mathematically so that's what I'd prefer as a long term shareholder.”
JPMorgan cut its quarterly dividend to a nickel from 38 cents back in February 2009. The stock would tumble to its credit crisis bottom a month later.
“From an institutional investor standpoint, I would rather see share repurchase than dividends,” said Jon Najarian, co-founder of TradeMonster.com. “The tip-off is that when we see them committing capital to buy shares, they are not just doing it to pump up EPS by retiring shares, but telling me that they think shares are cheap. Putting their money where Jamie's mouth is.”
Nomura’s Schorr, who said he met with Dimon “recently”, said that low rates, weak loan demand and mortgage put-back risk will continue to be negative factors, but improvement in loan losses and international growth will more than make up for it.
Of course, some skeptical investors would say if Dimon was so “confident” in the future of their business, why wouldn’t he declare a dividend that the company would have to pay every quarter, rain or shine. A buyback program, after all, is easier to retract. As JPMorgan learned in 2009, investors want dividends forever.
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