Recently I wrote about stocks in the Dow Jones Industrial Average telecommunications sector, and noted that I would review the Dow stocks that are in each S&P 500 sector, one sector at a time. This time we will take a look at JPMorgan Chase & Co.
Total Return (YTD)
|Bank of America||0.5%||48.1%||9.0|
Source: S&P Capital IQ.
The table uses recent prices for these four companies to derive year-to-date stock price gains and total returns including dividend yields. The Motley Fool Earnings Quality Score database does not rank financial stocks, but the analysis will illuminate earnings quality issues. Stocks with poor earnings quality tend to underperform, so we look for trends that might predict future outcomes.
These financial sector stocks are just behind the telecommunications sector for year-to-date total returns, with 17.77% average return. JPMorgan has the lowest total return so far, but the highest dividend yield. In fact, as the return increases the dividend yield decreases for each stock. Lastly, P/E ratios are in line with total returns except for B of A.
JPMorgan offers every conceivable type of financial service, including investment and commercial banking, Treasury and securities services, asset management, retail financial services, and card services and auto. This was made possible when, under the Clinton administration, the Glass-Steagall Act (The Banking Act of 1933) was repealed, allowing banks like Morgan and Citigroup
JPMorgan's reported quarterly earnings of $1.21 equaled a 4% drop from $1.26 reported a year ago, but well above estimates of $0.71. Morgan's net income of $4.960 billion was down 8.7% from last year's $5.431 billion. Quarterly revenue of $22.057 billion was also short of last year's $24.969 billion for the same quarter. Net cash from investments for the quarter was a whopping -$110.414 billion. Despite this, Morgan spent $8.863 billion to repurchase 149.5 million shares, and reduced debt by $83.12 billion. Since its recent low of $31 in June, the stock has appreciated 19%. The 3.25% dividend makes Morgan an attractive investment alone, or as part of the group.
Travelers offers commercial and personal property and casualty insurance products and services to its clients. Surprisingly, Travelers is a fairly low-margin business at 8% net income, and operating cash flow has been in the 10% range for several quarters. Quarterly revenue of $6.359 billion was just below last year's $6.388 billion, and earnings were $1.26 per share. The company's balance sheet metrics look terrible. Receivables comprise 97% of revenue and days payable outstanding are 1,075 days, way up from last year's 872 days. Total payables equal $56.109 billion, or 882% of revenue. Working capital (current assets less current liabilities) are -$42.398 billion. As you might guess, Travelers has still managed to reduce its float by 84.631 million shares in two years. I would only buy this as part of the group.
The company is known worldwide for its charge and credit payment card products and services. AmEx has low variable costs, producing high gross and operating cash flow margins of 78%, and 44%, respectively. Revenue and cash flow manipulation is astounding, however. Days sales outstanding are at 729 days, or 798% of revenue. Days payable outstanding are shameful at 2,652 days, or 636% of revenue. But working capital equals $72.021 billion, so the money to pay bills is obviously there. Also, long-term debt is $55.953 billion, which is a highly leveraged 76% debt-to-capital ratio. Debt per share is $49.36. I would only buy this as part of the group.
Bank of America
B of A is another megabank like JPMorgan. The bank has been hurt by the tremendous mortgage bad debts it accrued from its former Countrywide and through the forced purchase of Merrill Lynch. The company made goodwill impairments of $15.5 billion since 2010, and paid an estimated $10 billion in legal settlements. Revenue is rising, however, and earnings are the best in three years. While the mortgage carnage continues, investors have become hopeful, reflected in the stock's appreciation. B of A's positive trend data suggest it will eventually improve its financial position, and could be a long-term play.
Foolish bottom line
As a group, the Dow financial sector stocks have produced decent results year to date, but individually their results have varied. They all benefit from being Dow components, but each of them has serious earnings quality issues. Foolish readers should keep earnings quality in mind when making investment decisions.
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Fool contributor John Del Vecchio is Co-Advisor to Motley Fool Alpha and co-manager of the Active Bear ETF (NYSE: HDGE ) . You may follow him on Twitter @johnfdelvecchio. He does not own any shares in the companies mentioned in this article. The Motley Fool has a disclosure policy.