Better Buy: Wells Fargo & Company vs. JPMorgan Chase

Image source: Wells Fargo.

The banking sector has come a long way in the past eight years, and those who've had the resolve to stick with major banks Wells Fargo (WFC -0.99%) and JPMorgan Chase (JPM 0.06%) through the financial crisis have been rewarded with strong returns. Yet even though long-term investors have more than recovered from their 2008 and 2009 losses and seen these bank stocks hit new all-time highs, the past year hasn't been as kind to either JPMorgan or Wells Fargo. As financial institutions wrestle with the ongoing challenges of a low interest rate environment, the once-imminent rise in short-term rates has remained on hold throughout much of 2016. Yet investors want to know which big bank is in the best position to benefit once economic conditions start to return to normal. Let's look more closely at Wells Fargo and JPMorgan Chase, using a range of common metrics to evaluate their merits.

Stock performance and valuation

The drought that the banking sector has gone through recently is evident when you look at share-price performance. JPMorgan Chase has lost 6% since June 2015, even when you include dividends in the total return. Wells Fargo has done far worse, falling 16% over the past year.

When you look at simple valuation measures based on earnings, Wells Fargo still looks a bit more expensive than JPMorgan even after its larger drop in stock price. Looking at trailing earnings, JPMorgan's stock trades at an earnings multiple of less than 11, compared to nearly 12 for Wells Fargo. Incorporating forward earnings expectations doesn't close the gap, as JPMorgan falls to below 10, versus around 11 for Wells Fargo.

Wells Fargo has historically enjoyed a premium valuation over many of its peers, and that shows up in its price-to-book ratio as well. The stagecoach-logoed bank trades at a 35% valuation to book value, while JPMorgan Chase gets only the smallest of book-value premiums at 2%. Even with its share-price decline, Wells Fargo still carries a higher valuation than JPMorgan Chase.

Dividends

One of the first casualties of the financial crisis was the dividend investor, because big bank stocks that had paid out substantial dividend yields suddenly had to suspend and dramatically reduce their payouts. For a while, several banks made token payments of just a penny per share, and others like Wells Fargo and JPMorgan had to slash their payouts to a nickel per share for a couple of years.

Since then, though, both stocks have made dividend comebacks. Wells Fargo now pays out $0.38 per share, which is up sevenfold from its lows and corresponds to a dividend yield of 3.2%. JPMorgan has been even more aggressive, sending its dividend up nearly ninefold to $0.44 per share and yielding 2.8%. Yet both stocks have retained healthy payout ratios, with investors getting just 30% to 40% of their respective banks' earnings in the form of dividends. That leaves both companies with room to boost their payouts as their financial conditions continue to improve. With its slightly higher yield, Wells Fargo looks more attractive currently from a dividend standpoint, but JPMorgan isn't far behind.

Growth prospects and risk

One reason why Wells Fargo and JPMorgan Chase have bounced back so strongly from the financial crisis is that they found ways to restore their growth. Yet the two banks have used different methods to recover. Wells Fargo has focused almost exclusively on the domestic financial industry, lending to U.S. companies and specializing in credit cards and mortgage loans to U.S. consumers. The bank has also chosen not to try to branch out heavily into trading for its own account, and that reduces the amount of financial market exposure that Wells Fargo has compared to its peers. Concerns about a decline in profitability have been partially responsible for its share-price weakness, but Wells Fargo intends to build market share in the fast-growing wealth management field and to look at other ways to broaden its business. An improving customer-satisfaction score has also given Wells Fargo an edge over its competition.

JPMorgan Chase has taken a broader approach toward making money, embracing opportunities both inside and outside of the U.S. market. As CEO Jamie Dimon told investors back in April, JPMorgan works in more than 100 countries across the globe, and he argues that the network effect of allowing existing clients to transition their account relationships into other countries as those clients grow their own international operations is essential to keep and grow those relationships. China in particular could become a huge source of business for JPMorgan, and even the negative interest rate environments in Japan and Europe aren't necessarily enough to hurt its banking operations over the long run. JPMorgan has arguably taken on more risk, but its broader source of potential return is fair compensation for that risk.

From an overall standpoint, both JPMorgan Chase and Wells Fargo have opportunities to deliver good value to shareholders and to produce long-term growth. JPMorgan has a slight edge in terms of growth potential relative to current price right now, but the disparity isn't big enough to conclude that Wells Fargo is a markedly inferior choice. Given the doldrums that both banks are suffering, now might be a good time to buy either Wells Fargo or JPMorgan Chase for the long haul.