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JPMorgan May Slash Dividend if Economic Condition Worsens


Following the annual stress test results announcement last week, JPMorgan JPM plans to maintain its dividend of 90 cents per share for third-quarter 2020. This is in sync with the Federal Reserve’s requirements amid coronavirus-related economic slowdown, with an aim of preserving liquidity.

The bank has been paying the current dividend amount after a12.5% increase in the same in September 2019. Based on yesterday’s closing price, JPMorgan’s dividend yield stands at 3.87%.

Jamie Dimon, chairman and CEO of JPMorgan said: “At this time, using both JPMorgan Chase’s and the Federal Reserve’s base case economic outlook, the Firm can continue to pay its dividend in future quarters while maintaining healthy capital and liquidity positions. If there is a significant deterioration in the future outlook, the Firm will, of course, consider reducing dividends.”

Actually, this time, the Fed has imposed restrictions on dividend payouts and share buybacks. Per the new requirements, banks’ total payouts cannot exceed the average quarterly earnings in the trailing four quarters.

Therefore, based on the above rule, this shouldn’t be a concern for JPMorgan at least in the near term. In case the economic backdrop worsens and leads to more reserve build, it will have an adverse impact on the company’s profitability.

In first-quarter 2020, the bank had set aside $6.8 billion as additional reserves to combat coronavirus-related slowdown. The company is projecting a similar figure for the second quarter as well, in order to protect itself from a potential wave of loan defaults.

Among the big banks, Wells Fargo WFC is likely to slash dividend payout in the third quarter as its earnings over the last few quarters have been hit by its involvement in several litigations, thereby raising legal costs. The bank currently pays 51 cents per share as quarterly dividend.

Furthermore, the central bank has restricted sharerepurchases, especially in the third quarter. Nonetheless, all major banks including JPMorgan, Bank of America BAC, Wells Fargo and Citigroup C have already suspended buybacks since mid-March. Dimon added that the company has no plans to resume buybacks “until the actual economic results improve substantially.”

Shares of JPMorgan have gained 3.3% over the past three months, underperforming the industry’s 5.3% growth.

Currently, JPMorgan carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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