JPMorgan Chase (JPM 0.49%), the largest bank by assets in the U.S., currently has an annual dividend yield of roughly 2.9%.
While that's certainly respectable, JPMorgan hasn't raised its quarterly dividend since 2021, which might make investors that buy the stock at least partly for the dividend wonder when the next increase is coming. Will JPMorgan Chase boost its dividend this year? Let's take a look.
Why bank dividends can be hard to project
Banks have regulatory capital requirements and can use any excess capital to invest in growth, make acquisitions, pay dividends, and buy back stock. Each year, regulators determine bank capital requirements based on the size, complexity, and riskiness of a bank. The key regulatory capital ratio to watch is the Common Equity Tier 1 (CET1) Capital ratio, which looks at a bank's core capital divided by its risk-weighted assets (RWAs) like loans.
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It has been difficult for large banks to raise their dividends in recent years because of the uncertainty around their regulatory capital requirements. Not only have they been increasing, but final bank regulatory capital requirements from the Basel Committee on Banking Supervision (BCBS), an international body that takes the lead on setting bank capital requirements, are slated to come out soon. Some large banks like JPMorgan expect to see their regulatory capital requirements rise again. This has required the largest banks like JPMorgan to build capital more recently, which made it tough for the bank to increase its dividend and also forced it to slow down on share repurchases.
Currently, JPMorgan has a required CET1 ratio of 12%. But management is expecting that BCBS' changes, along with the Federal Reserve's annual stress testing results, which typically come out in late June and determine a portion of bank CET1 requirements, will increase JPMorgan's total CET1 requirement to 13%. One percentage point may not sound like much, but because we are talking in terms of billions and trillions of dollars, any small change can make a big difference.
The bank's capital position
Due to the anticipated changes, JPMorgan has been working to improve its capital ratios, which it has done by building capital, largely through earnings generation and lowering RWAs. At the end of Q1, the bank had built its CET1 ratio to an impressive 13.8%. Management wants to keep an internal buffer of 50 basis points, or 0.50%, making the bank's expected internal target for the CET1 13.5%.
Through further earnings generation over the course of the year and other changes, management sees the bank having $20 billion of excess capital over its 13.5% CET1 target between now and the first quarter of 2024.
However, JPMorgan will likely have to pay a roughly $3 billion assessment fee to the Federal Deposit Insurance Corp.'s (FDIC) Deposit Insurance Fund in order to help replenish the fund following several bank failures this year. The potential changes from BCBS, the Fed's stress testing, and other regulatory changes that could occur due to everything that has transpired this year could raise JPMorgan's CET1 beyond management's 13% projected target.
In recent years when JPMorgan has raised its quarterly dividend, which is currently $1 per share, it has normally done so in 10-cent increments. With roughly 2.922 billion common shares at the end of Q1, doing another $0.10 increase would cost the bank an additional $292.2 million per quarter, or about $1.2 billion per year.
We'll know more soon
JPMorgan CEO Jamie Dimon said at the bank's investor day that its board of directors plans to make a decision on the dividend after it sees results from the Fed's stress testing, which are expected in June. The final BCBS regulatory capital rules should also come out soon. Dimon, however, added that "we obviously have the wherewithal to pay more of a dividend."
The bank will likely end up having sufficient excess capital even after all of the regulatory changes. JPMorgan's current dividend payout ratio is also only 24%, which leaves room for growth because most large banks tend to pay out in the 30% to 40% range.
The dividend decision will depend on the upcoming regulatory changes, Fed stress testing, and also how much in share repurchases JPMorgan would like to do. But I think a dividend raise is very likely later this year. Given the excess capital JPMorgan is projecting, a $0.10 raise to the quarterly dividend should be very doable. With the bank continuing to trade at a premium valuation, share repurchases are less attractive, so I think increasing the dividend would also make sense.
