Is JPMorgan's Share Buyback Right?

  Is JPMorgan's Share Buyback Right? Share buybacks are a tax-efficient way for companies to return their capital to their shareholders.   JPMorgan's management believes its stock is in a buyout position. Major banks began preparing to deal with the financial disaster caused by the pandemic in 2020. In this context, banks waiting for a wave of credit defaults set aside a reserve to offset large amounts of credit losses. The Federal Reserve (Fed) banned large banks from buying stocks and limited dividend payments from June. The aim was to stabilize capital, but the Fed changed its mind in December, allowing banks to buy shares again. Share buybacks are a tax-efficient way for companies to return their capital to their shareholders. Over time, buybacks that increase earnings per share cause stock prices to rise. Unlike dividends, which are taxed at the income tax rate, stock valuation tax does not have to be paid until sold. In this article, we'll take a look at JPMorgan, one of the banks that started a stock buyback program.

JPMorgan Chase JPM (NYSE) $166.05 +1.81(+1.10%)

With the Fed's statement, JP Morgan was the first of the block banks that announced that they would continue share buybacks. Having repurchased shares of approximately $4,3 billion at the end of the first quarter, the company had a total repurchase capacity of $7,4 billion in the second quarter.

Share buybacks are a tax-efficient way for companies to return their capital to their shareholders.

So, are buybacks really a good use for capital? If the company buys back overvalued stock, it is spreading the capital to a low expected future return. (For example, expansion or dividend payments.) JPMorgan is undervalued by at least two criteria. The price/earnings (P/E) ratio of 13 and the price/book value (P/B) ratio of 2 are well below the industry averages. It also means that the company has plenty of capital to distribute to its shareholders. JPMorgan demonstrated its market size in the first quarter, beating Wall Street estimates by nearly 45 %, thanks to massive growth in investment banking fees and the release of loan loss reserves. When considering these figures, it should be noted that JP Morgan increased its equity increase of $1,1 billion by 67 % last year.  

Source: The Motley Fool

 

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