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Should JPMorgan Ask for Share Buybacks or a Bigger Dividend?

Last Thursday, the Federal Reserve announced the results from part one of its Comprehensive Capital Analysis and Review, known informally as "stress tests." While there were a few big surprises to emerge for America's too-big-to-fail financial institutions, for JPMorgan Chase (NYSE: JPM  ) it was more of the same as last year -- which might be turn out to be a good thing for investors.

Stress-test catch-up
Just in case you missed the breaking JPMorgan news from last week, here's a quick recap:

Source: Dodd-Frank Act Stress Test 2013: Supervisory Stress Test Methodology and Results.

In the Fed's simulated, severe economic downturn, JPMorgan -- which had the relatively strong capital position of 10.4% going into the test -- would lose a significant 4.1% off its Tier 1 common capital ratio, leaving it at 6.3%.  

And 6.3% is without the implementation of any of JPMorgan's proposed capital actions: dividend increases or share buybacks. Where the superbank's common ratio might end up after those numbers are thrown into the Fed's equation remains to be seen, but it will officially be made public on Thursday.

Can -- and should -- JPMorgan request a dividend increase or share buybacks?
The median Tier 1 common capital ratio performance for the banks this year was 7.7%. The minimum regulatory standard the Fed requires is 5%. JPMorgan's 6.3% isn't stellar, but it probably isn't low enough for the Fed to turn down a request for an increased dividend or share buybacks.

In fact, JPMorgan's 2013 CCAR numbers are very close to its 2012 CCAR numbers: an actual Q3 2011 common ratio of 9.9% and a stressed ratio of 6.3%. After those results, the bank asked and got approval for $15 billion in share buybacks. So there's no reason to think the Fed wouldn't approve a similar capital-return scheme this year, and there's no reason the bank shouldn't ask for something.

However, although JPMorgan hasn't officially announced anything -- like the bank did last year, causing quite a stir in the financial community when it preemptively announced its share-repurchase plan -- according to Financial Times JPMorgan is only planning on asking for about half that amount this time around.

If that's the case, my guess would be the bank is being conservative after a tumultuous 2012 that saw it lose more than $6 billion in the London Whale trading debacle. After all, $6 billion is about halfway to the $15 billion mark.

What about a dividend increase?
The Fed has already indicated it won't look kindly on any dividend increases that cause a bank to go beyond a 30% payout ratio; JPMorgan's is currently 22%, so from the Fed's perspective, there's theoretically some room for maneuver.

But if Financial Times is correct, the bank isn't angling for a dividend increase anyway. And from an investor perspective, JPMorgan already pays a healthy dividend -- 2.4% -- at least in comparison to its peers.

Goldman Sachs (NYSE: GS  ) pays a paltry 1.3%, and even Bank of New York Mellon (NYSE: BK  ) -- one of the most conservative, solid banks out there -- only pays 1.8%. Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) only pay 0.3% and 0.1% respectively. (For the record, Citi has announced it will not increase its dividend, though it performed very well in this year's CCAR.)

Foolish bottom line
As a JPMorgan shareholder, my vote is for more share buybacks. I invest primarily for share-price appreciation and am more interested in the value of my shares than any more dividend. I'm also interested in the bank that I own shares in remaining strong and doing well into the future.

As such, I'm appreciative of the fact that CEO Jamie Dimon takes such good care of his bank's balance sheet, and I think this rumored request for a reduced share buyback is strongly indicative of that caretaking instinct. With the London Whale incident taken into account, Dimon is still, to me, the best risk manager in banking.

Expect JPMorgan to ask for and receive approval from the Fed for some sort of shareholder capital-return plan, but a very reasonable one, Foolish readers. And as Thursday's stress test results roll in for JPMorgan and and the rest of America's big banks, stay tuned to this space for continuing coverage. 

Looking for unequalled in-depth analysis on JPMorgan? Check out a new Motley Fool report on the superbank, written by Ilan Moscovitz -- The Motley Fool's senior banking analyst and JPMorgan Chase specialist. You'll learn where the key opportunities for the superbank lie, where its core growth will come from, and the potential business risks. You'll also get an analysis of its leadership team. For immediate access click here now.

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