There are a handful of stocks we hold in our client portfolios that I consider to be cornerstone stocks. These are the bluest of blue-chip companies such as Microsoft, Amazon and Coca-Cola. Another name, less well-known here in Australia is JP Morgan Chase (JPM). We added it to our portfolio before the regional banking crisis in early 2023 and have continued accumulating shares in the stock for most clients in their international portfolios in that time. The performance has been outstanding, and we expect their market leadership to continue.
There are several important reasons I like this company.
Firstly, they have outstanding management. It starts with their CEO of the past 18 years, Jamie Dimon. He has guided the bank from strength to strength including navigating not just JP Morgan through the GFC but the entire banking industry. He is the definition of a great leader.
Under his guidance, he has balanced the need to perform in the short term while optimising for the long term. His leadership and foresight have set JP Morgan up to achieve long-term growth while creating a culture of prudence and discipline that has delivered consistent results and made JP Morgan a beacon of stability in an era of disruption and change.
This discipline and stability enable the bank to not only weather the most difficult of financial storms but also to take advantage of them and add value to shareholders in the toughest of times. As the GFC took hold and big-name banks collapsed, JP Morgan’s position of strength enabled it to be a buyer at a time when no one else could. They were able to buy Bear Stearns and Washington Mutual in the process for pennies in the dollar.
More recently, the regional banking crisis in 2023 highlighted how susceptible the smaller US banks are to failure when depositors withdraw their funds and create a run on a bank. This caused the downfall of Silicon Valley Bank (SVB) because they were forced to sell assets at a loss. Once again, JP Morgan was able to capitalise on the situation by taking over SVB as well as First Republic.
More importantly though, it was their relative strength and stability that was able to help in heading off the crisis. Once JP Morgan stepped in, depositor concerns about their deposit dissipated. During that time, it became clear to me that going forward the banking world was going to change, consolidation was going to be inevitable, and the big will get bigger. Additionally, their global presence is growing and their investments in technology are paying off too. They will be a beneficiary in the advancement and integration of artificial intelligence technology.
But from a pure investment value perspective is what appeals to me most. Within our portfolios, we tend to buy Australian companies where the Australian market leader has similar attributes to their global peers. We prefer to buy exposure in international companies where you simply cannot invest in a theme domestically. For example, all things being equal on valuation, you might prefer Woolworths over Walmart, but you simply cannot find a domestic equivalent to Microsoft.
When you start comparing JPM to Australian banks, the difference in valuations is stark. Australia’s biggest and safest bank Commonwealth Bank of Australia (CBA) trades at a 22 times price earning (PE) ratio while JPM trades at just 11 times. Comparing their valuations to their profit, CBA is twice as expensive as JPM. While JPM has a market capitalisation of AUD $895b approx. four times CBA’s AUD $220b, one is dominant globally while the other is dominant in a nation of only 25 million.
Obviously, Australian investors love CBA and will point out it has a higher dividend at 3.7% fully franked compared to 2.2% for JPM. But this is where its critical to look under the hood and really understand how the numbers work. CBA pay out almost 80% of their profit to maintain that dividend. JPM only pay out about 25% of their profit as dividend. JPM could pay a higher dividend yield than CBA if they chose to. But they retain their earning to reinvest massively in the future as they position for global opportunities.
It's important to remember that the issues that created the regional banking issue back in 2023 haven't really disappeared. With all the geopolitical and economic uncertainty around the world, its critical to invest in companies with a proven track record. But history has shown that whatever the problems or crises that arise in the decade ahead, JPM will be positioned, ready and waiting patiently to capitalise on any opportunity. Few companies have a better track record, market strength and leadership to confidently enter a more difficult phase. Few are better positioned on the global stage than JP Morgan. This is why investors need to consider the best companies across the world, not just at home.
General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.