The Real Reason JPMorgan Rose
09/16/2010 5:35 pm EST
Maybe you're wondering why shares of JPMorgan Chase (NYSE: JPM) were up 3.4% on September 13?
The whole banking sector was up that day, of course, because the announced Basel III new banking regulations aren't as strict as some investors had worried they would be. That's a big deal for stressed European banks and smaller US banks that might have been in real trouble if regulators had forced them to raise capital overnight. (For more on the good news for banks from Basel III, see this post.)
The American Depositary Receipts (ADRs) of Credit Agricole (OTC: CRARY), for example, soared 6.8% on September 13. The French bank could have been hit really hard by a tighter deadline and higher capital ratios in the regulations.
And Regions Financial (NYSE: RF), a still-struggling US regional bank, popped 5.7% on the day.
But for the shares of one of the strongest US banks, one with no discernable capital ratio problems or need to raise capital to jump 3.42% on the day is still pretty impressive. It was a better gain than that showed by shares of large bank peers Bank of America (NYSE: BAC) and Citigroup (NYSE: C) that, at first glance at least, gain more from the compromises in Basel III.
It's a puzzle, no?
Not if you remember dividends. Investors didn't forget those handy payments of real cash today in bidding up stocks such as JPM, USBancorp (NYSE: USB), and Northern Trust (Nasdaq: NTRS). The latter two were up 3.3% and 2.7% on Monday, September 13.
The belief is-and it's one I agree with-that the release of the Basel III rules removes one of the last major sources of uncertainty preventing banks like JPM from reinstating their dividends at something like pre-financial crisis levels.
In 2008, the bank paid an annual dividend of $1.52 a share. In 2009, as part of the price for government capital, the bank cut its dividend to just 20 cents a share. At Thursday's share price of $41.12, a dividend of $1.52 would give the bank's shares a yield of 3.7%-not a bad jump from Thursday's yield of 0.4%.
I suspect that some investors are also already looking forward to the company resuming its pre-financial crisis history of raising dividends. The bank raised its dividend by 2.7% from 2007 to 2008 and by 8.8% from 2006 to 2007.
Of course, investors wouldn't be thinking about the company raising dividends if the bank hadn't come out of the financial crisis as one of the strongest US banks and if it didn't look like the bank was among the leaders in reducing its credit losses and its loan loss reserves.
But that position of relative strength was well known before today. The action on September 13 was mostly about the dividend.
I'm adding the shares to Jubak's Picks with this post. (I'll be buying for the portfolio on Friday.) I'm setting a target price of $55 a share by June 2011.Full disclosure: I don't own shares of any company mentioned in this post.