A closer look at JPMorgan preferred shares yielding 4.2% (NYSE: JPM)

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In some cases, it makes sense to take a look at preferred stocks issued by banks. While these preferred stocks don’t offer the same potential for capital gains as common stocks, they generally offer a slightly higher dividend yield and knowing how to own senior stocks can also be more comfortable. In this article, I wanted to take a look at the Series M Preferred Shares issued by JPMorgan (JPM), traded at (JPM.PM). It was a fairly large issue with $ 2 billion in preferred shares issued, at a preferred dividend yield of 4.2%.

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Data by YCharts

An overview of JPMorgan’s financial results and balance sheet

Before we dive into the specifics of preferred stocks, let’s first take a look at how JPM has performed so far. The bank will release its FY2021 results later this month, so we’ll be looking at the financial results for the first three quarters of 2021.

In the first nine months of the year, JPMorgan generated net interest income of $ 38.7 billion and additional total non-interest charges of $ 53.5 billion. This resulted in a provision for pre-tax and pre-loan losses of $ 38.9 billion. as you can see in the image below, JPMorgan was also able to recover nearly $ 8 billion in previously recorded loan loss provisions, which further increased pre-tax profit to $ 46.9 billion and net profit to about $ 37.9 billion.

Source: documents filed with the SEC

From the reported net income, we still have to deduct the preferred dividend payments and end up with $ 36.6 billion in net income attributable to JPMorgan shareholders. This represents EPS of $ 12.05 based on the average number of shares in the first nine months of the year. As the current number of shares has fallen to approximately 2.95 billion shares, attributable EPS would be approximately $ 12.38. Keep in mind, however, that the reversal of loan loss provisions will be a one-time tailwind.

Source: quarterly report

Adjusted for the contribution of the reversal of provisions, the underlying EPS in the first nine months of the year is around $ 10.20 (again using the current number of shares rather than the average number shares during the first three quarters).

JPMorgan currently pays approximately $ 400M per quarter in preferred dividends, which means that based on 9M 2021 results, the preferred dividend coverage ratio was approximately 3,150% (income attributable to common and preferred shareholders). ‘amounted to $ 37.8 billion in reported net income of $ 37.9 billion). Even if we removed the benefit of writing back loan loss provisions, preferred dividends still only require about 4% of total income. So the dividend coverage ratio for all series of preferred shares is quite good.

Series M preferred shares: Cannot be stacked but a lot of security

In the third quarter of 2021, JPMorgan issued 80 million units of its Series M preferred shares. Series M is a non-cumulative preferred stock with an annual preferred dividend of 4.20% per annum, resulting in $ 1.05 per share, paid in quarterly installments. The 80 million units have a total value of $ 2 billion, so this was a relatively big issue for JPMorgan.

While the 4.20% yield may be low, and the fact that the issue is a non-cumulative issue may be a deterrent for some investors, there are some positive features here as well.

If you look at the balance sheet, the total share of equity consists of approximately $ 290 billion, of which just under $ 35 billion is represented by senior equity. This means that there are roughly $ 255 billion in stocks that rank lower than preferred stocks. This adds an extra layer of security. Of course, if a bank were to collapse, having senior equity may not mean much. But assuming normal operations, there is plenty of junior equity to absorb the early shocks.

Source: quarterly report

On Series M non-stacking: I generally stay away from non-stacking issues because I like the extra protection that cumulative preferred shares offer, as the issuer should make the preferred shareholders whole on dividends Preferred employees missed before this may declare dividends on the common stock. In the case of JPMorgan, however, the risk of the bank failing to pay dividends to common shareholders appears to be rather low as there will be so much pressure on the bank to continue distributing cash to its shareholders.

Investment thesis

While the preferred stock yield is rather low, it far exceeds the common stock dividend yield as JPMorgan currently has a dividend yield of around 2.44%. Compared to this return, the Series M preferred shares are somewhat attractive and should essentially be seen as a trade-off between giving up potential capital gains in exchange for a (currently) higher return and the added level of security. provided by the possession of more senior titles. Whether or not to hold JPM preferred shares also depends on taxation, especially for foreign investors. In my case, my ‘take out’ return would be 2.68% which is a bit low and that means I would probably only be interested in picking up preferred stocks below the par value of $ 25 / share. and I would only do this as a diversification in my portfolio.

In conclusion, Series M preferred shares are ‘quite’ attractive for certain types of portfolios and it depends on whether you want to forgo the potential for capital gains on JPM shares and the potential (likely) dividend increases for a preferred dividend. fixed at only 4.20%.


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