A Nearer Look At JPMorgan’s 4.2% Yielding Most well-liked Shares (NYSE:JPM)


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In some cases it is useful to take a look at the preferred shares issued by banks. While these preferred stocks don’t offer the same capital gains potential as the common stocks, they typically offer a slightly higher dividend yield, and knowing how to own senior equity can also be more convenient. In this article, I wanted to take a look at JPMorgan’s (JPM) M series of preferred stocks, which trade under (JPM.PM). This was a fairly sizeable issue with $ 2 billion in preferred stock issued on a preferred dividend yield of 4.2%.

diagramData from YCharts

A quick look at JPMorgan’s financial results and balance sheet

Before we get into the specifics of preferred stocks, let’s first take a look at JPM’s performance to date. The bank will publish its results for fiscal 2021 later this month, so we’ll look at financial results for the first three quarters of 2021.

For the first nine months of the year JPMorgan had net interest income of $ 38.7 billion and total additional noninterest expense of $ 53.5 billion. This resulted in a provision before taxes and credit losses of $ 38.9 billion. As you can see in the picture below, JPMorgan was also able to recoup nearly $ 8 billion in previously recorded loan loss provisions, bringing its pre-tax profit to $ 46.9 billion.

Source: SEC filings

We have to deduct preferred dividend payments from reported net income and end up with net income of $ 36.6 billion attributable to JPMorgan shareholders. This corresponds to an EPS of USD 12.05 based on the average number of shares in the first nine months of the year. Since the current number of shares has decreased to approximately 2.95 billion shares, the attributable earnings per share would be approximately $ 12.38. Keep in mind, however, that withdrawing loan loss provisions will be a one-off tailwind.

Source: quarterly report

Adjusted for the contribution from the provision, the underlying earnings per share for the first nine months of the year is approximately $ 10.20 (again using the current number of shares instead of the average number of shares for the first three quarters).

JPMorgan currently pays approximately $ 400 million per quarter in preferred dividends, which means that based on results for the ninth month of 2021, the preferred dividend coverage ratio is approximately $ 37.9 billion). Even if we were to lose the benefit from withdrawing loan loss provisions, the preferred dividends would only take up around 4% of total income. So the dividend coverage for all series of preferred shares is pretty good.

The M series preferred shares: Not cumulative, but a lot of security

In the third quarter of 2021, JPMorgan issued 80 million units of its Series M preferred stock. The M-Series is a non-cumulative preferred stock with an annual preferred dividend of 4.20% per annum, making $ 1.05 per share paid in quarterly installments. The 80 million units are valued at $ 2 billion in total, so this was a relatively large expense from JPMorgan.

While the 4.20% yield may be small, and the fact that it is a non-cumulative issue may seem daunting to some investors, there are some positive traits here as well.

If you look at the balance sheet, the total equity component is approximately $ 290 billion, of which just under $ 35 billion is accounted for by preference shares. This means there is approximately $ 255 billion in equity that is subordinate to preferred stock. That adds an extra layer of security. Of course, if a bank were to collapse, having senior equity may not mean much. But assuming normal business operations, there are enough offspring to cushion the first shocks.

Source: quarterly report

On the subject of the M-Series being non-cumulative, I usually stay away from non-cumulative issues as I like the added protection of cumulative preferred stock as the issuer would have to make the preferred stockholders completely out of the missed preferred dividends beforehand and resolve dividends on the common stock be able. In the case of JPMorgan, however, the risk that the bank will not pay dividends to its common shareholders appears to be rather small as the pressure will be so great on the bank to continue to distribute cash to its shareholders.

Investment work

While the preferred stock yield is on the low side, it significantly outperforms the common stock dividend yield as JPMorgan currently has a dividend yield of around 2.44%. Compared to this return, the M Series preferred stock is somewhat attractive and should generally be viewed as a compromise between foregoing potential capital gains for a (currently) higher return and the added security of owning senior securities. Whether or not holding JPM preferred stock is interesting also depends on taxes, especially for foreign investors. In my case, my “take home” yield would be 2.68%, which is a bit on the low side and means that I would probably only be interested in getting the preferred stock below the par value of $ 25 / share, and I would only do a diversification in my portfolio.

To sum up, the M-Series preferred stocks are “somewhat” attractive to some types of portfolios and it depends on whether you are looking for capital gains potential on JPM stocks and potential (probable) dividend increases for a fixed preferred dividend of. only 4.20% would like to do without.

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