Everybody knows that the market has done well since the shenanigans of 2008, but the stock market is not itself a business–it simply aggregates the valuations of many different businesses. These businesses fire and splutter at different times, just as they drift in and out of fashion on one whim or another. So, although many companies may be fully priced at the moment, others are not. The hard part–of course–is to invest in the laggards that are merely unfashionable rather than those that are in permanent decline. With this noble goal in mind’s let’s compare JP Morgan today with its old self from ten years earlier.
| Dec 31, 2005 | TTM | |
| EPS (diluted) | 2.35 | 5.29 |
| Price/Earnings | 16.89 | 13 |
| Tangible book value per share | 16.45 | 44.69 (Dec ’14) |
| Price/TB | 2.41 | 1.5 |
| Book value per share | 30.71 | 57.77 |
| Price/Book | 1.29 | 1.2 |
| Common shares outstanding (diluted) | 3,557,000,000 | 3,763,500,000 |
| Dividend | 1.36 | 1.66 |
| Dividend yield | 3.4% | 2.4% |
| Dividend payout ratio | 58% | 31% |
| Share price | 39.69 | 69.10 |
| No. pages (annual report) | 144 | 320 |
So, over a tumultuous period that has included near financial mayhem followed by the most hostile climate for bankers in living memory, JP Morgan has still managed to compound its earnings at more than 9% per year. The bank is now earning 2.25 x as much as it was at the outset. The business has performed very well, and much better than its share price–in fact, if the share price had kept pace with earnings over this period then it would now be selling for $90, rather than $69. A far from shabby return, especially as it would not include dividends paid along the way.
Anyone with an eye on dividend income will probably laser in on today’s relatively lower payout today–namely 31% of earnings compared with 2005’s 58%. Keeping in mind that well-known aphorism about skating to where the puck is going to be, rather than where it is, that is a good thing because it leaves considerable headway for Jamie Dimon to hike the dividend over the coming years. Of course, if he doesn’t fancy that, then he can use his surfeit of earnings to buy back shares instead–after all, with a modest price/book of 1.2 then that will also make sense for long-term shareholders.
Will it perform as well over the next ten years? Who knows about that but, certainly, its starting valuation looks reasonable and its business prospects look healthy. It has grown market share, built a formidable balance sheet and is led by one of the most experienced and respected men in the much-maligned world of bankers. Finally, although it has so far been more elusive than a pot of gold at the end of a rainbow, a rise in interest rates cannot be much further off. This will provide a nice tailwind for the big banks by enabling them to increase the margins on any new loans they make.
Despite outperforming the S&P by 11% over the last year, JPM still looks better than average value to me and I will consider adding to my position at the present price. How will it perform over the next ten years if… we have a period of gently rising interest rates, diminishing political hostility to bankers, reduced competition, and a steadily growing US economy? Let’s hope that I’m not digging up this post in ten years time and laughing a dark and bitter laugh.
Disclosure: Long JPM.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.