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Ep 101: JPMorgan’s ‘High-Class Problem’: Its Rising Stock Makes Buybacks More Expensive

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What’s going on here?

  • Jamie Dimon is facing a problem: a lot of cash and an expensive stock. Over the past three years, Mr. Dimon’s JPMorgan has spent most of its profit on share repurchases, which has been a boon for shareholders.
  • The issue now is that JPMorgan shares, are getting more expensive. Analysts and investors are starting to ask if that means repurchases will slow.
  • CEO Jennifer Piepszak said that the bank would “look at alternatives” to buybacks if the stock continued to rise.

Many Happy Returns

  • Over the past three years, JPMorgan has paid out most of its profit in the form of buybacks and dividends.

In a buyback, a company uses its cash to buy its own existing shares. That means a company’s EPS can rise even if profits don’t. They can be a self-fulfilling prophecy: since each remaining share gets a bigger piece of the profit, that can drive investors to bid up the shares.

  • Buybacks return profits to shareholders, but they reward investors in the long term only if shares keep rising. There’s a long tradition of over-confidence about future prospects and spending billions to buy stocks that then go south.
    • Big banks, including JPMorgan, Citigroup and Bank of America had big buybacks in the years just before the financial crisis.
  • JPMorgan has been posting record profits. Its recent buyback spree has been a good deal.
    • The $59.5 billion of shares JPMorgan repurchased in the past 3 years would now be valued at about $75 billion.

The buyback myths

  • As buybacks have surged across corporate America, they have spurred criticism that companies are failing to think long term and care only about stock prices.
    • Companies on the S&P 500 have poured more than $5.3 trillion into repurchasing their own shares since 2010.
  • Investors say they still support repurchases for the same reasons executives have defended them: JPMorgan’s profitability is high and buybacks seem better than other options. By several metrics, JPMorgan and banks broadly remain cheap compared with other stocks.
Content source: Benoit. D. (2020) JPMorgan’s ‘High-Class Problem’: Its Rising Stock Makes Buybacks More Expensive. Wall Street Journal. Available from: https://www.wsj.com/articles/jpmorgans-high-class-problem-its-rising-stock-makes-buybacks-more-expensive-11580639401 [Accessed 4 February, 2020]

 

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