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JP Morgan Shareholder letter


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Finished reading Dimon's letter. It has some great parts but it is a little too long and unfocused.

 

On the good, Dimon is doing a real effort on trying to find a middle ground on the issue of regulation acknowledging a lot of the good. Dimon is also very specific, and it is not a laundry list, on what he does not like and sometimes is just a question of degrees.

 

I also liked very much Dimon's reasoning on why buyback its own stock is such a good deal for JPM and, I would argue, for all the banks.

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Finished reading Dimon's letter. It has some great parts but it is a little too long and unfocused.

 

On the good, Dimon is doing a real effort on trying to find a middle ground on the issue of regulation acknowledging a lot of the good. Dimon is also very specific, and it is not a laundry list, on what he does not like and sometimes is just a question of degrees.

 

I also liked very much Dimon's reasoning on why buyback its own stock is such a good deal for JPM and, I would argue, for all the banks.

 

His commentary on buybacks was absurd.

 

He said that he has no interest in buying back the stock at or above $45, yet he has normalized profit pegged at $23-$24 billion or a little over $6 per share in earnings. So at $45 he's talking about a 7.5x multiple and he won't buy back the stock? Even on current earnings of $19 billion at $45 per share he would be buying in at 9x earnings. Someone needs to talk some sense in to him.

 

In my opinion they should cut the dividend back to $0 and buyback as much stock as the gov't will allow them to do until the stock runs up ~$60 (unless they've repurchased a ton under that by the time it gets to $60, at which point this number goes higher).

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Finished reading Dimon's letter. It has some great parts but it is a little too long and unfocused.

 

On the good, Dimon is doing a real effort on trying to find a middle ground on the issue of regulation acknowledging a lot of the good. Dimon is also very specific, and it is not a laundry list, on what he does not like and sometimes is just a question of degrees.

 

I also liked very much Dimon's reasoning on why buyback its own stock is such a good deal for JPM and, I would argue, for all the banks.

 

His commentary on buybacks was absurd.

 

He said that he has no interest in buying back the stock at or above $45, yet he has normalized profit pegged at $23-$24 billion or a little over $6 per share in earnings. So at $45 he's talking about a 7.5x multiple and he won't buy back the stock? Even on current earnings of $19 billion at $45 per share he would be buying in at 9x earnings. Someone needs to talk some sense in to him.

 

In my opinion they should cut the dividend back to $0 and buyback as much stock as the gov't will allow them to do until the stock runs up ~$60 (unless they've repurchased a ton under that by the time it gets to $60, at which point this number goes higher).

 

I wasn't impressed by Dimon's commentary on buybacks either. Buffett's idea of buying back stock when the stock price is below conservatively calculated intrinsic value provided there are no better uses for cash, is much more logical. Maybe Dimon is just using book value as a conservative proxy for intrinsic value. But this does seem overly conservative given his estimate of JP Morgan's earning power.

 

I liked the letter in general. Good discussion of market making, but it might be old hat to some of the folks here.

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I like the fact that he is using BV and TBV as his measures of intrinsic value rather than normalised earnings, because book values are far more knowable than normalised earnings.  I think he's hit the nail on the head with his buyback thinking.  Buying back anywhere near $60 would be very aggressive in my opinion: I can't stand management teams that buy back above a conservative estimate of IV and you have to make a lot of assumptions to get to an IV of $60.  (I'm long JPM on a low cost base.)

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I like the fact that he is using BV and TBV as his measures of intrinsic value rather than normalised earnings, because book values are far more knowable than normalised earnings.  I think he's hit the nail on the head with his buyback thinking.  Buying back anywhere near $60 would be very aggressive in my opinion: I can't stand management teams that buy back above a conservative estimate of IV and you have to make a lot of assumptions to get to an IV of $60.  (I'm long JPM on a low cost base.)

 

I don't think you have to make very heroic assumptions to get to $60 IV. $5 per share in earnings is equal to the $19 billion they earned this year. 12x that figure gets you to $60. This gives no credit to his belief that they'll hit $23-$24 billion, which should be a layup between winddown of legacy mortgage and growth in the int'l franchise.

 

 

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I like the fact that he is using BV and TBV as his measures of intrinsic value rather than normalised earnings, because book values are far more knowable than normalised earnings.  I think he's hit the nail on the head with his buyback thinking.  Buying back anywhere near $60 would be very aggressive in my opinion: I can't stand management teams that buy back above a conservative estimate of IV and you have to make a lot of assumptions to get to an IV of $60.  (I'm long JPM on a low cost base.)

 

I don't think you have to make very heroic assumptions to get to $60 IV. $5 per share in earnings is equal to the $19 billion they earned this year. 12x that figure gets you to $60. This gives no credit to his belief that they'll hit $23-$24 billion, which should be a layup between winddown of legacy mortgage and growth in the int'l franchise.

 

I need to go back and re-read to be sure, but I think he was using TBV and BV as buyback points to get a good return on the money--if they have some required return on investment, perhaps buying above TBV doesn't reach that return relative to IV (e.g., they could invest it elsewhere to get higher returns).  Isn't it the same reasoning that Buffett uses for buybacks (i.e., only buy back at extremely conservative IV values)?

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I personally would not value JPM at 12x earnings.  In some ways it is a great franchise, but it is highly levered and leverage = risk.  I'd cap out at 10x in a market where I can get unleveraged great franchises on 14x (e.g. 3M).

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I think some of the arguments pro and against are a little off of what Dimon is saying. So let me quote the critical paragraphs. I do not think he is saying what others say he is saying:

 

So buying back stock is a great option – you can do the math yourself. Haircut our earnings numbers that analysts project and forecast buying back, say, $10 billion a year for three years at tangible book value. With these assumptions, after four years, not only would earnings per share be 20% higher than they otherwise would have been, but tangible book value per share would be 15% higher than it otherwise would have been. If you like our businesses, buying back stock at tangible book value is a very good deal. So you can assume that we are a buyer in size around tangible book value. Unfortunately, we were restricted from buying back more stock when it was cheap – below tangible book value – and we did not get permission to buy back stock until it was selling at $45 a share.

 

Our appetite for buying back stock is not as great (of course) at higher prices. If you run the same numbers as above, but at $45 per share, buybacks would be accretive to earnings and approximately break even to tangible book value – still attractive but far less so. Currently, above $45 a share, we plan to continue to buy back the amount of stock that we issue every year for employee compensation – we think this is just good discipline.

 

As for the excess capital, we will either find good investments to make or simply use it to more quickly achieve our new Basel III targets. Rest assured, the Board will continuously reevaluate our capital plans and make changes as appropriate but will authorize a buyback of stock only when we think it is a great deal for you, our shareholders.

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I think some of the arguments pro and against are a little off of what Dimon is saying. So let me quote the critical paragraphs. I do not think he is saying what others say he is saying:

 

So buying back stock is a great option – you can do the math yourself. Haircut our earnings numbers that analysts project and forecast buying back, say, $10 billion a year for three years at tangible book value. With these assumptions, after four years, not only would earnings per share be 20% higher than they otherwise would have been, but tangible book value per share would be 15% higher than it otherwise would have been. If you like our businesses, buying back stock at tangible book value is a very good deal. So you can assume that we are a buyer in size around tangible book value. Unfortunately, we were restricted from buying back more stock when it was cheap – below tangible book value – and we did not get permission to buy back stock until it was selling at $45 a share.

 

Our appetite for buying back stock is not as great (of course) at higher prices. If you run the same numbers as above, but at $45 per share, buybacks would be accretive to earnings and approximately break even to tangible book value – still attractive but far less so. Currently, above $45 a share, we plan to continue to buy back the amount of stock that we issue every year for employee compensation – we think this is just good discipline.

 

As for the excess capital, we will either find good investments to make or simply use it to more quickly achieve our new Basel III targets. Rest assured, the Board will continuously reevaluate our capital plans and make changes as appropriate but will authorize a buyback of stock only when we think it is a great deal for you, our shareholders.

 

I think Dimon has buybacks nailed on the head.  He understands exactly how much he should or should not be paying for his own stock.  This is a very difficult concept for many CEO's to grasp.

 

I had the same problem with ITEX's board about buybacks.  They were insistent on not buying back shares...then changed their mind and said that they would buy back shares...then went all the way and made a tender on 1M shares at a price significantly higher than the market price and above book.  The buyback will be accretive to earnings because they aren't making much on the cash, but it won't increase book value per share.  They could have bought shares in the open market below $4 for the last six months!

 

Why would Dimon buy back large amounts of his shares unless they are trading at a significant discount?  He completely understands that at higher prices it may be accretive to earnings, but that it would not be accretive to book or tangible book.  He's smart enough to be patient!  Cheers!

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Why would Dimon buy back large amounts of his shares unless they are trading at a significant discount?  He completely understands that at higher prices it may be accretive to earnings, but that it would not be accretive to book or tangible book.  He's smart enough to be patient!  Cheers!

 

I don't think anyone here is suggesting that Dimon should buy back shares when they are not trading at a significant discount. The question is whether buying only below book value is too conservative, given that Dimon threw out 23-24 billion as JP Morgan's normalized earnings. Even if JP Morgan buys back shares above book, if the purchase is done at a share price below intrinsic value, eventually the purchase will be accretive to book value. It might just be that Dimon's estimate of JP Morgan's IV is lower than mine; and his number is certainly more likely to be right than mine! :-)

 

It is interesting that JP Morgan bought back shares at over $45 per share in early 2011, which was greater than book value at the time. It sounds like Dimon has gotten more conservative with buybacks.

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Why would Dimon buy back large amounts of his shares unless they are trading at a significant discount?  He completely understands that at higher prices it may be accretive to earnings, but that it would not be accretive to book or tangible book.  He's smart enough to be patient!  Cheers!

 

I don't think anyone here is suggesting that Dimon should buy back shares when they are not trading at a significant discount. The question is whether buying only below book value is too conservative, given that Dimon threw out 23-24 billion as JP Morgan's normalized earnings. Even if JP Morgan buys back shares above book, if the purchase is done at a share price below intrinsic value, eventually the purchase will be accretive to book value. It might just be that Dimon's estimate of JP Morgan's IV is lower than mine; and his number is certainly more likely to be right than mine! :-)

 

It is interesting that JP Morgan bought back shares at over $45 per share in early 2011, which was greater than book value at the time. It sounds like Dimon has gotten more conservative with buybacks.

 

Re-read that paragraph excerpted by PlanMaestro.  Dimon isn't saying he's resistant to buying back shares at $45...just that it's not as effective, nor as appealing an alternative.  Basically, that the return on investment at that price isn't high enough to warrant LARGE share buybacks. 

 

My example of ITEX was the same as what Dimon was stating.  The board wasn't interested in share buybacks when the stock traded at $3.25, but suddenly issues a 1M share tender at $4.20!  Go figure!  Most CEO's will overpay for their own stock because of their hubris or other reasons...just ask Eddie Lampert.  Dimon won't, a la Buffett!  Cheers!

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