Bank stocks are in a fairly good position. While the rise in interest rates is a negative headwind for certain sectors, banks are among the beneficiaries, as their net income margin increases from higher rates.
In addition, as the U.S. economy continues to grow, quality U.S. banks are able to raise their dividends after passing the Federal Reserve's stress tests.
Let's look at three mega-banks for dividend investors:
One to Chase: JP Morgan Chase
JPMorgan (JPM) is a global banking behemoth with a $400 billion-plus market capitalization and about $154 billion in annual revenue. JPMorgan competes in every major segment of financial services, including consumer banking, commercial banking, home lending, credit cards, asset management and investment banking.
JPMorgan posted second quarter earnings on July 14th, revealing results that were better than expected on both the top and bottom lines, and by wide margins on both. Adjusted earnings per share came to $4.37, which was 61 cents ahead of expectations. Earnings were positively impacted by $2.7 billion on the First Republic purchase, which generated a bargain purchase gain. However, First Republic also created a $1.2 billion build in net credit reserves.
Revenue was $41.3 billion, up 35% year-over-year, and beating expectations by $2.45 billion. Provisions for credit losses excluding First Republic were $1.2 billion, with charge-offs coming in at $1.4 billion. Charge-offs were driven primarily by the credit card business. Noninterest expense was $20.8 billion, up from $20.1 billion in Q1, and up from $18.7 billion in the year-ago period. Net interest income was $21.8 billion, up from $20.7 billion in the prior quarter, and up sharply from $15.1 billion in the second quarter of 2022.
Total loans were $1.3 trillion, up from $1.13 trillion. Deposits ended the quarter at $2.4 trillion, up fractionally. The company's extremely low loan-to-deposit ratio remains a strength, and a lever for future growth potential.
JPM has a dividend payout ratio of 27% projected for 2023. We see the payout ratio remaining under 40% for the foreseeable future. The bank has increased its dividend for 12 consecutive years. Shares currently yield 2.7%.
Old Standby: Citigroup
Citigroup (C) was founded in 1812, when it was known as the City Bank of New York. In the past two centuries, the bank has grown into a global juggernaut in credit cards, commercial banking, trading, and a variety of other financial activities. It has thousands of branches, produces about $79 billion in annual revenue, and has a $90 billion market capitalization.
Citigroup posted second quarter results on July 14, showing adjusted EPS fractionally missed estimates at $1.37. Revenue was off by 1.2% year-over-year to $19.4 billion, but that narrowly beat expectations. Weak revenue was driven by investment banking and equity market revenue, which was partially offset by good results in Treasury and Trade Solutions, and Securities Services. Net credit losses were $1.5 billion, up from $1.3 billion in the prior quarter, and $850 million in the year-ago period. Net allowance build was $161 million, down from $241 million in Q1, and $375 million in last year's Q2.
Total loans were $661 billion at the end of the quarter, up from $652 billion in the March quarter. Deposits were $1.32 trillion, down fractionally from Q1. Still, Citi's loan-to-deposit ratio remains extremely low and could be a source of growth should the company decide to begin lending them out.
Citi is pulling back on lending at the moment due to less than favorable spreads on loans, which is resulting in extremely low loan-to-deposit ratios. That is a headwind, as it results in higher deposit costs without commensurate lending revenue, crimping top line and margin growth. However, the company's buybacks could be good for a mid-single-digit reduction in the share count annually.
Citi's payout ratio is only 36% of estimated earnings this year. The company hiked its dividend by 4% in July. Shares currently yield 5.2%.
Goldman Opportunity
Goldman Sachs (GS) is one of the world's leading financial companies, particularly in investment banking. It competes in a wide variety of service activities to a diverse and broad base of global customers. The company should produce about $47 billion in revenue this year.
Goldman reported second quarter earnings on July 19th, 2023. Earnings came to $3.08 per share, while revenue declined 8.2% year-over-year to $10.89 billion, but did beat estimates narrowly. The quarter was messy given the company is moving away from its push into consumer finance, including reducing investments in the space, and selling the GreenSky platform. That move alone caused a $504 million goodwill impairment as GreenSky.
Net interest income was $1.68 billion, while provision for credit losses were $615 million, versus a $667 million provision in last year's Q2. Loans were $178 billion, unchanged from Q1. Deposits were higher, however, rising from $376 billion to $399 billion. Total operating expenses were $8.54 billion, up 12% year-over-year. That includes the $504 million goodwill impairment from GreenSky, and impairments of $485 million in real estate write-downs.
Goldman boosted its dividend, with the payout rising 10% to a new annualized dividend of $11 per share. Goldman's payout ratio is still under half of earnings, meaning the dividend is safe, even after the big increases announced in recent years. These qualities make Goldman an appealing stock for current income as well as dividend growth. GS stock has a 3.4% dividend yield.
Disclosure: No positions
