November 30, 2023

JPMorgan: Steady Yield, Inflation Shield

JPMorgan (JPM) is an international services company. In addition to commercial banking, the company offers investment and wealth management, corporate and investment banking, loans, and other financial services.

With interest rates set to rise, this steady-yielding income stock could outpace the market as it will benefit from higher yields.

I am bullish on JPMorgan stock.

Net Interest Income to Rise in 2022

Inflation is on the rise in the U.S., rising to nearly 7% in the last report. Because of this, interest rates will likely rise in 2022 faster than previously expected. This could help companies like JPMorgan to increase its net interest revenue. After the 2008 financial crisis, the Federal Reserve kept rates very low until 2018, when the average yield rose to 1.79%. 2019 was the recent high point with an average yield of 2.16%. After the COVID-19 pandemic began, the Federal Reserve again slashed rates to near zero.

In 2018, with rates normalizing, JPMorgan grew its net interest revenue by 10%. This growth continued in 2019, gaining another 4%. Since the rate cut associated with the pandemic, net interest revenues are down over 5%. This could reverse course in 2022 and beyond as yields begin to rise.

Overall revenues have climbed considerably over the trailing twelve months, as net charge-offs have come in lower than expected. When COVID-19 hit, the banks conservatively estimated future losses and took a significant income hit for fiscal 2020. Many of these charge-offs did not materialize; great news for JPMorgan and its investors.

Because of this, the net margin has grown to 38% over the TTMs after falling to 29% in fiscal 2020. This should moderate in 2022, but investors should expect a healthy net margin well above 30%.

Steady Yield Supported by Buybacks

JPMorgan has grown its dividend for 13 straight years. It now stands at $1.00 per quarter and yields around 2.4%. The payout ratio is very low, at 23.4%, making the dividend extremely safe. The dividend was last raised in Q3 2021.

Over the TTMs, JPMorgan has also repurchased over $16 billion in stock. This amounts to nearly 3.5% of the current market cap. Stock repurchases support the share price and offer investors a tax-deferred return of capital. JPMorgan has been prolific at stock buybacks in recent years.

The stock buyback also helps the valuation by reducing the share count and increasing earnings-per-share. The stock is trading at a price-to-earnings (P/E) ratio of just 10. This is less than it was selling for before the pandemic.

The stock also gained nearly 29% in 2021; this is a terrific performance on top of the steady dividend. These combined factors offer investors a compelling entry point for a stable yielding financial services company.

Wall Street Analysis

Over on Wall Street, analysts are somewhat bullish on JP Morgan stock, with a Moderate Buy consensus rating based on 11 Buys, two Holds, and two Sells.

The average JPMorgan price target of $179.62 implies 13.4% upside potential.

Looking to 2022

Inflation is a significant concern for investors as we head into 2022. With inflation comes higher interest rates. So why not look for stocks that have the potential to benefit from higher rates? That is the case with JPMorgan. Net interest revenue should rise along with yields. Coupled with the steady 2.4% yield and the support of stock buybacks, JPMorgan seems like a solid buy for 2022.

Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.

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