Analyzing JPMorgan Chase & Company’s Dividend Growth Potential

Recap from October’s Picks

My Dividend Growth Stocks Model Portfolio underperformed the S&P 500 from October 30, 2019 through November 22, 2019. The Model Portfolio rose 1.7% on a price return basis and 1.8% on a total return basis. The S&P 500 rose 2.2% on a price return and total return basis. The portfolio’s best performing stock was up 24%. Overall, 13 out of the 30 Dividend Growth Stocks outperformed the S&P from October 30, 2019 through November 22, 2019, and 20 had positive returns.

Only my firm’s research utilizes the superior data and earnings adjustments featured by the HBS & MIT Sloan paper, “Core Earnings: New Data and Evidence.” The long-term success of my model portfolio strategies highlights the value of my firm’s Robo-Analyst technology[1], which scales forensic accounting expertise (featured in Barron’s) across thousands of stocks[2].

The methodology for this model portfolio mimics an All-Cap Blend style with a focus on dividend growth. Selected stocks earn an attractive or very attractive rating, generate positive free cash flow (FCF) and economic earnings, offer a current dividend yield >1%, and have a 5+ year track record of consecutive dividend growth. This model portfolio is designed for investors who are more focused on long-term capital appreciation than current income, but still appreciate the power of dividends, especially growing dividends.

Featured Stock from November: JPMorgan Chase & Company

JPMorgan Chase & Company (JPM) is the featured stock from November’s Dividend Growth Stocks Model Portfolio.

Since 2010, JPM has grown revenue by 2% compounded annually and after-tax profit (NOPAT) by 8% compounded annually. The company earned $34.2 billion in NOPAT over the trailing twelve months, which is up 15% over the prior TTM period. JPM’s NOPAT margin is up from 15% in 2010 to 24% TTM while its return on invested capital (ROIC) improved from 7% to 11% over the same time.

Figure 1: JPM’s Revenue & NOPAT Since 2010

Analyzing JPMorgan Chase & Company’s Dividend Growth Potential

JPM Revenue & NOPAT Since 2010

New Constructs, LLC

Steady Dividend Growth Supported by FCF

JPM has increased its annual dividend each of the past nine years. The company increased its annualized dividend from $1.58/share in 2014 to $2.72/share in 2018, a 14% compound annual growth rate. Its current quarterly dividend, $0.90/share, equates to $3.60/share annually. Most importantly, JPM easily generates the cash flow needed to continue paying and growing its dividend. Over the past five years, JPM has generated a cumulative $76.9 billion in FCF (19% of market cap) while paying $42.4 billion in dividends.

Companies with FCF well in excess of dividend payments provide higher quality dividend growth opportunities because I know the firm generates the cash to support a higher dividend. On the other hand, the dividend of a company where FCF falls short of the dividend payment over time cannot be trusted to grow or even maintain its dividend because of inadequate free cash flow.

Figure 2: Free Cash Flow (FCF) vs. Regular Dividend Payments

Analyzing JPMorgan Chase & Company’s Dividend Growth Potential

JPM FCF vs. Dividends Since 2014

New Constructs, LLC

JPM Is Undervalued

At its current price of $131/share, JPM has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects JPM’s NOPAT to permanently decline by 10%. This expectation seems rather pessimistic for a firm that has grown NOPAT by 8% compounded annually since 2010 and 11% compounded annually over the past two decades.

If JPM can maintain TTM (24%) and grow NOPAT by just 3% compounded annually for the next decade, the stock is worth $158/share today – a 21% upside. See the math behind this reverse DCF scenario. Add in JPM’s 2.7% dividend yield and history of dividend growth, and it’s clear why this stock is in November’s Dividend Growth Stocks Model Portfolio.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings as shown in the Harvard Business School and MIT Sloan paper, “Core Earnings: New Data and Evidence”.

Below are specifics on the adjustments I make based on Robo-Analyst findings in JPMorgan Chase & Company’s 2018 10-K:

Income Statement: I made $6 billion of adjustments with a net effect of removing $218 million in non-operating expense (<1% of revenue). See all adjustments made to JPM’s income statement here.

Balance Sheet: I made $56.4 billion of adjustments to calculate invested capital with a net increase of $38.9 billion. The most notable adjustment was $16.1 billion (6% of reported net assets) related to goodwill. See all adjustments to JPM’s balance sheet here.

Valuation: I made $48 billion of adjustments with a net effect of decreasing shareholder value by $38.9 billion. The largest adjustment to shareholder value was $28.4 billion in preferred stock. This adjustment represents 7% of JPM’s market value. See all adjustments to JPM’s valuation here.

Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.

[1] Harvard Business School features the powerful impact of my firm’s research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.

[2] This paper compares my firm’s analytics on a mega cap company to other major providers. The Appendix details exactly how we stack up.

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