JP Morgan Flirts With Special Dividend

One of the first articles I ever wrote as a columnist at Seeking Alpha was titled “JP Morgan: A Smart Bet For The Patient Investor” in which I offered: “If you are a patient investor, and have a 5-10 year horizon, you will probably do quite well. I expect JP Morgan to deliver double digit dividend growth over the medium term which will eventually bring the stock price up with it.”

Since I wrote that article in November 2011, earnings at JP Morgan have grown at a 17.5% annualized rate, dividends have grown at a rate of 20.0%, and the stock price has compounded at a rate of 27.2%.

When the price of the stock goes up at a greater rate than earnings by 10% for five years in a row, it is wise to pause and reassess: Has the transition from undervaluation to fair valuation crossed over into fair valuation?

Since Election Night, JP Morgan stock has shot up from $70 to almost $84. To me, that is unsupportable, even if Dodd-Frank gets repealed in full.

The highest earnings projections for JP Morgan in 2021 call for the megabank to earn $7.75 in profit. Broadly speaking, the bank’s fair valuation is the 8-12x valuation range. Even if you peg a 12x earnings multiple on it, that only gives you a stock price of $93 per share. That is only 12% total capital appreciation over the next five years under optimistic conditions.  I would absolutely refrain from buying any JP Morgan stock at this point, and if I were a buy-and-holder, I would use the $93 threshold as the basis for selling (my price point at which I’d sell a buy-and-hold stock is when the current price of the stock gets priced ahead of itself by five years under optimistic projections.)

You know the overvaluation is getting bad when even the CEO of a large bank is alluding to his own stock getting pricey.

At the Goldman Sachs Investors Conference today, JP Morgan CEO Jamie Dimon said: “At a certain price, we may consider issuing a special dividend to distribute excess capital rather than buying back additional stock. If the stock is not cheap compared to its intrinsic value, we would rather pay out capital to existing shareholders than buy back stock from selling investors.”

The stock rose on the news that income investors may be receiving a special dividend. While the one-time infusion of cash may be nice for the shareholders already on board, I do not see this as a reason to initiate a position in the stocks. CEOs are loathe to acknowledge that their own stock is expensive–it takes a substantial amount of overvaluation for an executive to point out that his own stock has gotten too pricey.

For the past five years, you’ve had the opportunity to buy JP Morgan in the $40s, $50s, and $60s. Any of those prices could have been considered sensible. Now, there is a near certainty that JP Morgan stock is overvalued, as it is trading close to its expected 2021 stock price under a cheery set of assumptions. The CEO’s flirtation with a special dividend is a formal acknowledgement that now is not the time to rush into this bank stock.