JP Morgan’s (NYSE: JPM) Earnings Season Shocker, Business Isn’t That Bad

An Earnings Season Bellwether Blows Past Consensus

If you were looking to the big banks and JP Morgan Chase (NYSE: JPM) as a bellwether indicator of earnings season let me assure you, the portents are good. JP Morgan reported top and bottom-line results that not only beat the consensus, but they also smashed right through them. The company says its calendar 2nd quarter revenue grew nearly 15% to exceed consensus by 900 basis points.

On the bottom end results are equally good and underpinned by the consumer. Earnings per share topped $1.35 and beat consensus by a quarter. The news that really juices the results though are the provisions for credit losses. The company was expected to increase reserves by nearly 10% on a quarter-to-quarter basis and far exceeded those expectations. Credit reserves grew more than 26% to $10.47 billion putting the bank’s cash position on the firmest footing its been on in years.

"We earned $4.7B of net income in the second quarter despite building $8.9B of credit reserves because we generated our highest quarterly revenue ever, which demonstrates the benefit of our diversified global business model," CEO Jamie Dimon said

JP Morgan’s Dividend Just Got Interesting

JP Morgan’s dividend was attractive enough before the Q2 results were released but now there is an interesting new twist. Two events cast a shadow of doubt on JP Morgan’s future regarding both buybacks and dividends in the very recent past. The first came from the Fed. The Fed put a cap on dividends and buybacks forcing the big banks to preserve capital in the Q2/Q3 time period. The Fed says the banks, banks like JP Morgan, will have to resubmit capital plans later this year, plans that could impact future dividend payments.

The second came from JP Morgan itself. CEO Jamie Dimon said the bank wouldn’t resume buybacks until actual economic progress was made. He went on to say the bank was able to pay its current dividend, yielding about 3.70%, without issues for many quarters to come. Dimon qualified his comments saying a dividend cut may come if the situation warranted it but right now that is as far from the case as may be.

“Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy,” CEO Jamie Dimon said in the release. “However, we are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm.”

Looking forward, based on these results, investors can assume the dividend is safe. At 3.70% the yield is very attractive and borderline “high yield”. Regarding future increases and/or buybacks. They may not come this year but the odds favor increases of capital returns over decreases. The payout ratio was fairly low in the mid 60%s range before the Q2 release and now it is lower and likely to get lower in the coming quarters. Assuming credit losses are less than expected and/or provisions are more than enough to cover them a future distribution increase could be substantial.

The Technical Outlook: Bullish With An Analyst Tailwind To Boot

I’ll be honest, shares of JPM have been wallowing near the post-pandemic lows unlike some other stocks in the market. That said, the shares have been putting in a bottom and the earnings news has them moving higher. Assuming the pre-market levels, about +2.0%, hold or are exceeded by the close an extended run to the upside looks inevitable. Business is better than expected and the company gave positive guidance for the fiscal year.

The analysts were already leaning toward very-bullish in regards to this stock and now they will have to raise their Q2 estimates. The consensus price target is about $110, about 10% upside from the premarket level near $99.50, but that is likely to get raised in the coming weeks. A move up to the $110 level would confirm a technical reversal in the stock that could lead to another 10% to 20% upside, not counting the dividend. Notably, competitor Wells Fargo (NYSE: WFC) just cut its dividend and its shares are moving higher too.