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Buy JPM — Why Whale Fine Won’t Sink JPMorgan Stock

jpm jp morgan chase logoJPMorgan Chase & Co. (JPM) just settled with regulators to pay a $920 million fine relating to the “London Whale” trading scandal.

On top of the billions of dollars JPM lost because of the ill-advised trades, the bank stock is dishing out even more as penance for running a “hedging” strategy that didn’t actually hedge JPM risk at all — and could have resulted in even deeper losses for JPMorgan, and perhaps widespread risk to the financial system at large.

But while the price tag is big, investors shouldn’t worry. JPM stock is sitting pretty, pays a good dividend and remains a strong long-term investment. Here’s why:

Whale is old news: Remember, this happened in 2012 and the bank has long moved on. In fact, in his annual letter to JPM stock holders, CEO Jamie Dimon said, “Let me be direct: The London Whale was the  stupidest and most embarrassing situation  I have ever been a part of. But it is critical  that we learn from the experience — otherwise, it truly was nothing but a loss.” JPMorgan has moved on, and is better for it.

Dividend darling: JPMorgan’s income potential can’t be understated. Dividends are back to 38 cents a share quarterly, where they were before the financial crisis, which annualizes out to a 2.9% yield. Not bad — and with the Federal Reserve requiring all banks to get approval for any increases, you can be sure this is sustainable even should another curveball be thrown your way. The fact that Bank of America (BAC) and Citigroup (C) still pay a mere penny per quarter while JPM is back to pre-crisis levels with its dividend is telling, and with a payout ratio that’s less than 25% of earnings, you can bet that dividend will continue to move higher.

Reach: Though smaller these days, JPM still does over a $100 billion in annual revenue, and thanks to the “too big to fail” shenanigans of 2008 has actually emerged bigger and more entrenched than ever, with the carcasses of Bear Stearns and Washington Mutual rolled into JPMorgan operations during the Great Recession. JPM is now the largest bank in America by assets.

Fair value: Even after a 50% run since 2012 lows, JPMorgan stock is trading at book value — without a penny of premium. JPM also is valued at barely two times its revenue, less than peers like Wells Fargo (WFC), which trades 2.5x sales, with other financials like Europe’s HSBC (HBC) or regional Key Corp. (KEY) trading even higher. And while earnings are facing headwinds, the forward P/E for JPM stock remains in single digits.

Cyclical play: The biggest reason to buy JPM is that, long term, there’s no better cyclical play than the banks that lend to consumers and businesses. And because of the aforementioned reach of JPMorgan Chase, it’s in the perfect spot to capitalize when things improve. That may not be this year or even in 2014, but eventually the U.S. economy will come roaring back — and you’ll want to share in that success via the financial sector.

There are obviously risks here. Another $1 billion sucked out of JPM profits is not insubstantial, and of course there are signs that economic slowdown in the U.S. could sap some of the gains we’ve seen in commercial lending or mortgage lending.

But frankly, the problem at banks hasn’t been lending profitably but simply lending frequently. JPMorgan Chase is streamlined and playing it safe right now, and has had over a year to prepare for a steep London Whale fine.

The real fireworks will come when the bank opens up its lending and fuels a significant profit surge in the years ahead.

So stake out a position in JPM while you can.

Related Reading on JPM

  • Full details on the London Whale fine, and where the money goes. (MarketWatch)
  • Felix Salmon on why lending at banks is very profitable these days … when they chose to lend, that is. (Reuters)
  • JPM shareholder letter for 2012, where Dimon owns up to the Whale debacle on page 10. (JPMorgan Chase)

Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at or follow him on Twitter via @JeffReevesIP

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