Dear Mr. Berko:
Instead of renewing a $7,000 certificate of deposit at JPMorgan Chase for 1 percent about a year ago, we bought 200 shares of JPMorgan Chase’s stock from Fidelity at $31 because it paid a 4 percent dividend. We’ve never owned a stock before, except for mutual funds in our work retirement plans. This was a gamble because I am retired and don’t like to take chances. Our insurance agent, who also is a financial planner, recommends that we sell our JPMorgan Chase stock and put the money in an annuity that guarantees 5 percent. He guarantees I wouldn’t lose money. Would you please give me advice on what to do?
N.P., Joliet, Ill.
The Federal Reserve has been trying hard during the past three years to repair crashing home values and push up stock prices. And in the process, you, like hundreds of thousands of others, for the first time, invested in the market to improve your yield. Most stocks have moved higher primarily because the Fed has made certain there are trillions more dollars chasing the stock market than at any time in its history. However, when interest rates rise again, you and lots of your contemporaries will sell dividend investments and return to the safety of CDs and savings.
JPMorgan Chase & Co. (JPM-$52.77) is one of the finest banks on either side of the international date line. JPM has $2.5 trillion in assets, 5,600 branches and a dividend that yields 2.9 percent, and it trades at slightly less than its $56.60 per share book value. Most on the Street believe JPM’s revenues, earnings and dividend growth will continue to set records and suggest a price target in the middle $80s by 2016-17. Management did a yeoman’s job of limiting its losses during the financial crisis several years ago. CEO Jamie Dimon is enormously respected. The bank has a stellar balance sheet. Loan loss provisions continue to decline, while loan volume continues to grow. Net interest rate margins are beginning to improve. Net interest income is increasing. And JPM’s loan exposure to questionable mortgages and subprime loans is significantly less than its peers’ exposure. The shares trade at a low 10 times earnings, and the continuing recovery in the housing market should ensure that JPM will have growth for years to come.
Practically all the suits on the Street, or SOTS, recommend JPM as a primary ingredient in every growth and income portfolio. And because JPM’s dividend payout to earnings has averaged a stingy 25 percent (most banks pay out 40-plus percent), many of those SOTS expect the board to grow the dividend aggressively in the coming few years. I believe that the SOTS are overenthusiastic, but enthusiastic is easy to be, considering that JPM is a world-class act.
Now, I may be as wrong as an earache, but I think the economy is in the middle of a banking bubble among the big banks. Some observers believe the housing market is losing its steam. Selling prices have begun to moderate, and most of today’s would-be home buyers are underemployed and lack the income to qualify for a mortgage. Personal loan demand is low and shows little sign of growth, and consumers are eschewing their checking accounts in favor of plastic with credit balances.
Meanwhile, JPM’s branch system is growing like wildflowers, and Dimon seems to be opening new branches in every corner, nook and cranny of the nation. That takes money, and Dimon has publicly stated that he’d prefer to invest JPM’s earnings in new branches or buy back JPM stock rather than grow the dividend for investors. So sell JPM. At this level, I think the downside risk exceeds the upside potential.
And rather than buy an annuity, ask that Fidelity broker about a new 8 percent preferred stock (BANCP-$25.47) issued by First PacTrust Bancorp Inc. (BANC-$13.49), a sweet California bank with a 3.3 percent (and headed higher) dividend yield. The $25 preferred stock, which just came public, has a $2 dividend and yields 7.9 percent. Buy 300 shares of the preferred and 200 shares of the common stock.