By Andrew Bary
JPMorgan Chase CEO Jamie Dimon’s frank talk on stock repurchases Monday is rare for a corporate leader but ought to be heeded by his fellow corporate chieftains.
At the company’s investor day, Dimon said the company would limit its stock repurchases given the elevated price of the JPMorgan stock.
“We’re not going to buy back a lot of stock at these prices,” Dimon told attendees at the investor day. JPMorgan stock has returned about 45% over the past year and recently hit a record high.
“We’ve been very, very consistent,” Dimon said. “When the stock goes up, we’ll buy less and when it comes down, we’ll buy more,” he added.
Dimon’s view is espoused publicly by few CEOs save for Berkshire Hathaway’s Warren Buffett.
Companies regularly repurchase stock regardless of price. Why? CEOs may truly believe their shares are undervalued even at high prices or they are afraid of the signaling effect of a reduction or elimination of a buyback program on the stock price.
The risk is paying too much for stock. Companies ranging from Charter Communications to Hertz Global Holdings have bought back stock at much higher prices than where their shares now trade.
More companies ought to do what JPMorgan does — favor dividends over stock buybacks at higher stock prices.
Dimon’s comments, which were in keeping with the remarks on the company’s earnings conference call in April, helped depress JPMorgan shares , which fell 4.5% at $195.58 in the session.
The other negative Monday at the investor day was the 68-year-old Dimon’s comments suggesting that he would leave the top sooner than previously believed. “The timetable isn’t five years anymore,” he said, referring to what had been his standard response to the succession question.
JPMorgan has been repurchasing a modest amount of stock and favoring dividends over stock repurchases as a way of returning cash to shareholders. JPMorgan has lately been buying back $2 billion of stock per quarter, which works out to about 1.5% of its market value of $563 billion.
The company pays out more in dividends — roughly $13 billion annually — than its current buyback rate of $8 billion. The dividend yield is 2.3% and the bank has boosted its payout twice in the past year and is now paying a quarterly dividend of $1.15 per share.
Dimon’s maverick approach lately has weighed on investor sentiment. In his preview for JPMorgan investor day, Wells Fargo analyst Mike Mayo wrote: “Investors we have spoken w/ have questioned if they should buy JPM stock when the CEO has talked down the economy, stock markets, buybacks, and even JPM’s own stock.”
Long-term holders have little to complain about.
JPMorgan’s stock has bested those of peers and the S&P 500 over the past five years and recently traded at a record $205. The stock has returned 15.6% annually including dividends during the past five years, against 15% for the S&P 500 and 9.2% for its chief rival, Bank of America. JPMorgan is one of the few big banks that has beaten the index since 2019. Its shares have returned 45% in the past year, in line with that of peers.
Berkshire CEO Buffett takes a similar approach to Dimon.
“In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse,” Buffett wrote in the company’s 2020 annual letter.
Berkshire has modulated its share repurchases, buying back a lot of stock in 2020 and 2021 — around $25 billion in each of those years — when the stock was lower and less more recently. Berkshire’s buybacks totaled $9.2 billion last year and $2.6 billion in the first quarter.
Big technology stocks, for instance, continue to emphasize stock repurchases. Apple recently boosted its annual buyback program to $110 billion to $90 billion — and got a rousing investor reception. With the stock trading at $191, or about 30 times the current fiscal-year earnings estimate, it’s debatable whether that $110 billion is the best use of Apple’s profits.
In a recent earnings call, Luca Maestri, Apple CFO, said the augmented buyback reflects “the continued confidence we have in our business now and into the future.”
Apple’s dividend is just 0.5% and total dividend payments annually are $15 billion, a fraction of the stock buyback total. It’s arguable that Apple, and some of its tech peers including Meta Platforms and Alphabet, should allocate more to dividends than stock buyback with their shares near record levels. Meta and Alphabet now have dividend yields of 0.5% after initiating payouts this year.
Buyback programs are rife in technology stocks — seemingly regardless of valuation. Snowflake, the software company valued at more than 150 times earnings, has a $2 billion buyback program in place.
Stock buybacks are important but company fundamentals drive share prices. Just look at Amazon.com and its phenomenal stock performance despite the lack of a buyback program.
Dimon doesn’t even buy the idea that buybacks amount to a cash return to shareholders. “We do not consider a stock buyback returning cash to shareholders. That’s giving cash to exiting shareholders. We want to help the existing shareholders,” Dimon said Monday.
Write to Andrew Bary at andrew.bary@barrons.com