Dividend Stock Wars, Banking Edition: JP Morgan vs. Wells Fargo (Part 2)
On Monday, I conducted the first three rounds of this month’s Dividend Stock Wars.
There are still four more rounds to go. So let’s get cracking…
~Round 4: High Cash Balance
Dividend payments don’t grow on trees. So we want to make sure there’s enough cash to sustain dividends if times get tough. And the more cash-rich the company, the better.
Luckily, thanks to the Fed, JP Morgan and Wells Fargo simply aren’t allowed to pay dividends, let alone increase them, if their balance books aren’t strong.
So when it comes to cash balance compared to dividends paid, it’s no surprise that both JP Morgan and Wells Fargo receive a clean bill of health.
Last quarter, Wells Fargo generated enough cash from operations to cover its dividends by six times over. And even though that’s respectable coverage by any measure, JP Morgan beats it by a long shot. It pulled in enough cash over the same period to pay its dividend 16 times.
Advantage: JP Morgan
~Round 5: Minimal Need for Credit
The more pressure there is to pay down debt and reduce payments on interest, the more likely it is that management will give cash distributions the shaft.
Because of the potential squeeze that debt can put on cash distributions, finding those companies with manageable amounts of debt on the books should be a priority when looking for long-term dividend investments.
Wells Fargo currently holds 1.12 times its total liabilities in assets, while JP Morgan’s total assets come in at 1.08 times total liabilities. Even though Wells Fargo has a slightly better debt ratio, the difference is small enough that it doesn’t matter.
~Round 6: Earnings Buffer
Just like cash, earnings can provide a buffer, as well. We can track this buffer by calculating a company’s dividend payout ratio (DPR), which is earnings per share divided by the annualized dividend.
As a general rule, I recommend investing in companies with DPRs of less than 80%. The lower the percentage, the less chance there is of a cut if earnings go south.
Again, because the Fed is closely monitoring dividend increases, the DPRs of both banks are being kept artificially low. So low, in fact, that payout ratios should be rising considerably as the Fed loosens its control.
Now, because the Fed is keeping DPRs artificially low, it means that shareholders aren’t getting as much in dividends as they otherwise would.
So this leads to an anomaly. Usually, the lower the DPR the better. But due to the wacky effects of Federal oversight, it’s the higher DPR that takes the cake, in this case.
Wells Fargo wins the round here, giving shareholders just a tad bit more of the earnings pie, with a dividend payout ratio of 25.8% versus JP Morgan’s DPR of 21.4%.
Advantage: Wells Fargo
~Round 7: Dividend Yield and Growth
There’s nothing more basic and self-explanatory than dividend yield and growth. So I’ll spare you the 101 and cut right to the chase.
Wells Fargo’s yield clocks in at 3%, beating JP Morgan’s 2.87% by just a hair. Yet JP Morgan’s three-year dividend growth rate of 92.26% is substantially better than Wells Fargo’s growth rate of 71.8% over the same period.
Given my preference for aggressive growth over yield, I’d normally award JP Morgan the win in this case. But, once again, because of the Fed’s suppression of growth rates, normal considerations are null and void.
Both banks can be expected to grow dividends enormously over the next few years, so it makes more sense to go with the initial bang for your buck. In other words, the higher yield.
Advantage: Wells Fargo
~Round 8: Valuation
Last, but not least, it’s always prudent to make sure you’re not overpaying.
Both banks are a bargain, however, with price-to-earnings ratios considerably below the S&P average of 16.9.
But Wells Fargo currently trades at 11.5 times earnings compared to JP Morgan’s slightly less expensive P/E of 9.5.
Advantage: JP Morgan
Let’s Go to the Scorecard…
After eight rounds, it’s a dead heat, with two draws and three wins for each bank. In the end, both Wells Fargo and JP Morgan are excellent investment options in the financial sector.
Because Federal stress testing demands it, balances are strong, dividend growth is sustainable and earnings are on the rise.
But I’m interested to hear your take on it. So if you think you have a tiebreaker – or general questions or feedback – email us at FeedBack@DividendsAndIncomeDaily.com.