JPMorgan or Wells Fargo: Which Is the Better Bank Stock for Income Investors?

Quarterly earnings season is here, and once again the big U.S. banks lead off. JPMorgan Chase and Wells Fargo got first-quarter earnings season off to a strong start, as both surpassed expectations for revenue and earnings per share. Steady economic growth and a strong housing market continue to fuel growth in loans and deposits for the nation's big banks. In the meantime, both stocks reward shareholders with hefty dividend yields. JPMorgan offers a 2.9% yield, while Wells Fargo yields 3.8%. Indeed, the banks are two of the top dividend-paying financial stocks. Assuming the U.S. economy stays out of recession, the future outlook remains positive for JPMorgan and Wells Fargo. With modest stock valuations, both continue to be attractive stocks for value and income investors. Earnings Roundup Wells Fargo reported quarterly revenue of $21.6 billion, down 1.5% from the same quarter last year. However, revenue beat analyst estimates by $555 million. Adjusted EPS of $1.20 also beat expectations, by $0.10 per share. The company grew EPS by 25% year over year. However, many of Wells Fargo's core operating metrics deteriorated in the first quarter, while the company gave disappointing guidance as well. Revenue in the core community banking segment declined 1% year over year, due to lower mortgage banking income. Wells Fargo continues to feel the repercussions of the fake accounts scandal that is still having a measurable impact on its operations. JPMorgan's results were even stronger. First-quarter revenue of $29.9 billion increased 4.7% year over year, and beat expectations by $1.8 billion. Meanwhile, EPS of $2.65 beat estimates by $0.30 per share. It was a healthy beat on both the top and bottom line for JPMorgan. EPS increased 12% from the same quarter last year. JPMorgan's much better revenue result was due to broad-based strength across the company's operating segments. In its consumer bank, core loans and deposits increased 4% and 3%, respectively. Client investment assets rose 13% to $312 billion. In investment banking, JP Morgan remained #1 in global investment banking fees last quarter. Debt underwriting revenue surged 21%, while advisory revenue advanced 12%. Reason for Future Optimism The most important growth catalyst for the banking industry is the health of the U.S. economy. Fortunately, U.S. GDP is still growing. The unemployment rate remains low, and the stock and housing markets remain in good shape. These are all broadly positive indicators that should continue to fuel positive EPS growth for both Wells Fargo and JPMorgan. That said, investors should note the impact of a flattening yield curve on the big banks. The U.S. Federal Reserve recently paused its interest-rate hikes, acknowledging that inflation remains under control, while global economic growth could slow down moving forward. The impact of global trade tensions and tariffs between the U.S. and other countries is beginning to dampen economic conditions. While not an immediate concern, a flattening yield curve is challenging for banks, as it reduces their ability to earn a wide spread between interest paid on deposits, versus interest collected on loans. In a flat yield curve environment, the rates at which banks lend approaches the rates they have to pay to depositors. This compresses their net interest margin, a key driver of profitability for Wells Fargo and JPMorgan. Indeed, Wells Fargo's interest margin fell three basis points to 2.91% from the previous quarter. Wells Fargo also saw a flattening yield curve last quarter. Net interest income, a critical metric for banks, was roughly flat last quarter on a year-over-year basis, at $12.3 billion. Investors should continue to monitor Wells Fargo's net interest margin in future earnings reports. Meanwhile, JPMorgan reported 8% growth in net interest income, a much stronger result than Wells Fargo, due to higher rates along with balance sheet growth and a more favorable loan mix. JPMorgan continues to post superior growth to its close rival Wells Fargo, which makes it a more attractive dividend growth stock as well. Bank on Strong Dividends Investors likely have bad memories of the major U.S. banks slashing their dividend payouts during the Great Recession. Indeed, Wells Fargo cut its quarterly dividend payout by 85% to just $0.05 per share in 2009. For its part, JPMorgan also cut its quarterly dividend payout by 85% in 2009, also to $0.05 per share. Fortunately, the ensuing recovery from the Great Recession fueled a long period of dividend growth over the past 10 years. Although once again, JPMorgan has a pronounced lead on Wells Fargo. Wells Fargo's quarterly payout has returned to $0.45 per share, while JPMorgan now pays a quarterly rate of $0.80 per share. Further dividend increases are very likely, as both companies are highly profitable with room for future EPS growth. Consensus analyst forecasts call for JPMorgan to generate EPS of $9.68 for 2019. With a current annualized dividend of $3.20 per share, JP Morgan has an expected dividend payout ratio of 33%. Wells Fargo is expected to generate EPS of $4.93 in 2019, for an expected dividend payout ratio of 37%. Wells Fargo has a slightly higher dividend payout ratio, which means JPMorgan has more room for dividend growth. This is even more likely because Wells Fargo gave relatively disappointing guidance for the remainder of 2019. Wells Fargo expects net interest income to decline 2%-5% this year versus prior expectations of down 2% to up 2%. Declining net interest income is likely to hinder the company's ability to raise its dividend at the same rate as JPMorgan, which has been the case over the past several years. Final Thoughts The U.S. banking sector is broadly healthy, and assuming the economy stays out of recession, conditions remain supportive of continued growth moving forward. JPMorgan and Wells Fargo are both modestly valued stocks with hefty dividend yields. Investors looking primarily for current yield might prefer Wells Fargo, which has a 3.8% yield compared with 2.9% for JPMorgan. Income investors looking for cheap stocks have reason to buy both stocks, while investors with an eye for growth should prefer JPMorgan. (JPMorgan Chase is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)

JPMorgan or Wells Fargo: Which Is the Better Bank Stock for Income Investors?

Both big banks are modestly valued with hefty dividend yields.

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