JPMorgan Looks to Raise Dividend - Analyst Blog

On Tuesday, JPMorgan Chase & Co.'s (JPM) CEO Jamie Dimon commented in an interview on CNBC that the company will soon increase its annual dividend to the range of 75 cents to $1 per share. The dividend hike is expected in the second quarter of 2011.

According to Mr. Dimon, once the Federal Reserve completes stress tests of the large U.S. banks and gives its approval, JPMorgan will be among the first U.S. banks to increase its dividend. At present, the company pays an annual dividend of 20 cents per share, with a dividend yield of 0.4%. However, an increase in dividend in the range of 75 cents to $1 will provide the investors with a dividend yield of 1.7% to 2.2%.

Why Stress Test?

The large U.S. banks will have to undergo another round of stress tests securing approval from the Federal Reserve to increase their dividends or buy back shares. In fact, all 19 banks that were subject to the stress tests in 2009 had submitted their capital plan to the Fed last week.

All the 19 banks, including big names such as JPMorgan, Bank of America Corp. (BAC), Wells Fargo & Company (WFC) and Goldman Sachs Group Inc. (GS) will have to demonstrate that they have adequate capital to address potential losses over the next two years under various scenarios. These are mainly a precautionary measure amid economic recovery.

JPMorgan and other banks view the stress tests as a step towards dividend hike. Due to recession, the Fed had barred all banks from increasing their respective dividends, coupled with increased government intervention as a result of the bailout program. As many of these banks repaid the bailout money, they began pressuring regulators to let them restore their dividends. The Federal Reserve has finally given in to this demand.

Improvement or Recovery?

Before the financial crisis struck, banks had targeted an average dividend payout ratio of about 40%. However, due to the recession, they had to significantly reduce their payout ratios.

JPMorgan last increased its quarterly dividend in the third quarter of 2007 by 12% to 38 cents per share, which continued till the first quarter of 2009. Thereafter, the company had to reduce the dividend to 5 cents per share. This has been the case with almost all the U.S. banks, as they had taken bailout from the government to stabilize their financials.

These banks now want to hike their dividends, as they have already repaid the bailout money and there has been a significant turnaround in their financial conditions from what it had been during the financial crisis.

However, the hike in the annual dividend for JPMorgan is a sort of recovery as prior to the recession the company used to pay $1.52 per share.

How Soon?

The results of the stress tests are likely to be announced by the end of the first quarter of 2011. The economic benefits of the stress tests are indisputable. These would somewhat reconstruct the banks' weak capital level, which threatens the economy.

So, if most of the major banks pass the stress test and consequently get the permission from Federal Reserve to increase dividend payment, this will definitely accelerate the pace of economic recovery.

Currently, JPMorgan currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.

 
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