My Bullish Thesis

CEO ("Jamie Dimon")

He previously served on the Board of Directors of the Federal Reserve Bank of New York. He also founded Citigroup (Another one of the big 4 banks) with Sandy Weill. Dimon was also included in Time magazine's 2006, 2008, 2009, and 2011 lists of the world's 100 most influential people.

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He knows the banking industry really well and has a lot of experience. He has grown JPM into the largest bank in the United States.

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The Bull Thesis

The Largest Bank - The four largest banks in the United States are JPMorgan & Chase, Bank of America, Wells Fargo, and Citigroup ("The Big 4"). JPMorgan & Chase is the largest bank by about $100 B. 

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A Short  Lesson on Dividends Feel Free to Skip if you Know the ins and outs of Dividends

Whether or not a dividend is paid is entirely the decision of the Board of Directors of the company. Typically, when it comes to dividends, a dividend yield of about 3-5% is normal. A higher dividend yield can mean that the dividend is at risk of getting cut. If you see a dividend higher than 5% make sure to check the balance sheet to make sure that there are no underlying issues with the company's earnings or debt and determine whether or not the company will be able to continue to pay the dividend. This is not an exact science.

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Dividend - Currently, JPM yields about 4% which is not too high and not too low.This  means that for every share you hold JPM returns .90 cents per quarter. Or $3.60 per share per year. The payout ratio is about 50% (JPM pays out half of its earnings in the form of dividends) (Payout ratios between 35-55% are considered "healthy" meaning the company can continue paying the dividend without its earning suffering too badly). JPM's dividend is fairly safe.

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Safety - The United States banks are backed by the United States government because of their importance in the proper functioning of the economy.

 

A Short History Lesson

If the banks fail, then the Government is almost required to bail them out, otherwise United States citizens would not be able to withdraw the money that they were supposed to have in their bank accounts. This was a big issue during the Great Depression of the 1930's, it's not as big of an issue today because now if the bank fails the Government almost immediately bails them out.

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This makes the banking industry arguably the safest industry in the market.

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The Bear Thesis

COVID-19 - The pandemic had a severely detrimental impact on the banking industry in particular. However, there is a potential for a slight benefit in the long run. Let me explain.

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The main ways that a bank makes money are from (1) service charges and fees, and (2) lending money to people and businesses and receiving interest on the loans. Although the first method may have been detrimentally impacted by COVID-19 the key concern here is the second method.

 

Due to the outbreak of COVID-19 many businesses had to close their doors for extended periods of time. Many small businesses went bankrupt and closed forever. JPM, as the largest bank, was the loan holder for many of those businesses. If a business is suffering or goes bankrupt and cannot pay the principal or the interest on their debt then not only will JPM's earnings suffer but the bank could lose the entire principal of the loan. Obviously, that is bad.

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However, one benefit of COVID-19 for JPM is that because a lot of businesses could not do business they were forced to take on more debt in order to survive. It's grim, but this could bring about a potential benefit to JPM in future years if these companies' earnings return to normal and are able to pay down their debt to JPM then the bank will receive more earnings in the form of interest.

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Heavily Regulated Industry - Although this is probably a good thing, it is also a factor that inhibits the revenue growth of the banks. The banking industry is one of the most heavily regulated industries in the stock market.

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Boring - Rarely does anything exciting ever happen in the banking industry. This makes JPM not as exciting to invest in as a company like Tesla or Apple or many other companies. Also, since the banking industry is rarely in the news (except for when they do something bad) the banking industry is not going to go up 100's or 1000's of percent per year.

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Conclusion

This is a boring safety/dividend stock. It is good to hold some of these in your portfolio.