Year-to-date, JPMorgan Chase (NYSE:JPM) stock is down about 33%. The Street is now debating whether the current global health crisis will also translate into a full-blown economic meltdown. So many investors were glad to say good riddance to the first quarter of the year. Now they are getting ready to embrace the potential volatility the upcoming earnings season is likely to bring to the JPM stock price.
Today I’d like to discuss what the new quarter may mean for the shares of the banking giant which is expected to report first-quarter earnings on April 14.
Variables such as interest rates, economic growth, global political developments and now pandemic worries all have an impact on a bank’s stock price. Therefore there will likely be wide daily price swings in JPM shares as news headlines change. Long-term investors may consider buying the dips, especially if the price goes toward or below $80.
JPM Stock and the Pandemic
JPMorgan Chase is the biggest U.S. bank based on deposits and revenue. The largest U.S. issuer of credit cards is also a leader in investment banking. It currently has around 5,000 branches across the country.
The spread of the novel coronavirus means that millions of people in the U.S. and indeed globally now live in some form of a lockdown. Understandably social distancing measures have also meant the shutdown of corporate offices, big and small businesses alike, schools as well as events.
JPMorgan has closed 20% of its branches due to the pandemic. Many of its employees are also working from home.
Analysts concur that quarterly and annual profits of a large number of firms are likely to be lower due to the impact of COVID-19. And this reality was reiterated by CEO Jamie Dimon in a shareholder letter released on April 6.
“At a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008. Our bank cannot be immune to the effects of this kind of stress … [It] should be expected that our earnings will be down meaningfully in 2020,” he wrote.
InvestorPlace contributor Luke Lango has written a detailed piece on how he believes “in 2008, banks were part of the problem — in 2020, they will be part of the solution.”
And I agree with his analysis of how many of our robust banks, including JPMorgan, will be able to weather the current storm in the long run. But during the quarter, there might still be some uncertainty regarding the share price.
Is the Dividend Safe?
Over the years, JPM has been rewarding long-term investors with generous cash distributions in terms of dividends and buybacks.
Dividends and stock repurchases concern shareholders because they have an effect on investment returns. In Q4, the group distributed a total of $9.5 billion to shareholders in the form of dividends and share repurchases of $6.7 billion.
However, recent developments may be changing the fact management will look after its shareholders through capital distributions over the long term.
Earlier in March, the bank announced that it’d suspend share buybacks and will instead use that capital to lend to businesses as well as individuals. Several other banks, including Bank of America (NYSE:BAC), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and Wells Fargo (NYSE:WFC), have also decided to stop buying back stock.
Investors are now wondering if banks will have to suspend dividends, too. Long-term JPM stock investors still enjoy a current dividend yield of about 4.0%.
In his shareholder letter, Dimon highlighted how the bank could be affected differently under various scenarios for the U.S. economy in the coming quarters. Accordingly, the most severe case would be where the economy contracts by 35% in the second quarter and unemployment rises to 14%.
He said that “if [this scenario] were to play out, the Board would likely consider suspending the dividend.”
What To Expect From Q1 Earnings
In mid-January, the group delivered robust top- and bottom-line Q4 and annual numbers that pleased analysts. Dimon said, “[the bank] entered this crisis in a position of strength. 2019 was another strong year for JPMorgan Chase, with the firm generating record revenue and net income … [It] earned $36.4 billion in net income on revenue of $118.7 billion, reflecting strong underlying performance across our businesses.”
The group’s diversified business operates in four segments:
- Consumer & Community Banking (largest segment by net income);
- Corporate & Investment Bank;
- Commercial Banking; and,
- Asset & Wealth Management (most profitable segment due to strength in trading).
When the bank reports quarterly results in about a week, the Street will pay attention to how strong its respective operational segments have been.
At this point, investors know that most businesses are going through unprecedented times. And the recent decline in JPM stock price reflects that grim outlook.
Goldman Sachs (NYSE:GS) recently said that in Q2 the U.S. economy could shrink by 34%. Similar sentiment was echoed by Morgan Stanley (NYSE:MS) which sees a contraction of 38% in the second quarter. These numbers correspond to the worst-case scenario that JPM’s CEO highlighted in his letter to shareholders.
If the bank’s actual metrics as well as forecasts for Q2 and the rest of the year are alarming, then investors may decide to hit the Sell button once again.
Investor Takeaway JPMorgan Stock
The economic pain of the pandemic is becoming more severe as millions are asked to stay at home and reduce social interactions. We don’t yet have enough clarity on the status of our economy. Thus many names, including JPMorgan stock, may be vulnerable to further declines in the coming weeks.
Yet things for the average citizen, the economy will eventually improve later in the year. Therefore, if you’re looking to add a bank to a long-term portfolio, you may consider JPMorgan stock. I’d be a buyer especially if the price falls toward or even below $80.
In addition to exhibiting strength in business segments, the company has other catalysts that are likely to aid the share price. For example, its 9.3x forward price-to-earnings multiple is likely to catch the attention of value investors.
Finally, those investors who would like some JPMorgan Chase exposure but are nervous about the prospects for the year may consider buying into an exchange-traded fund (ETF) that has JPM stock as a holding. Examples of such ETFs include the iShares U.S. Financial Services ETF (NYSEARCA:IYG), the Financial Select Sector SPDR Fund (NYSEARCA:XLF) or the Vanguard Financials ETF (NYSEARCA:VFH), all of which have JPM shares as either the biggest or second-biggest portfolio holding.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.