When you study banks' business operations – the dollars they have under management, etc. - the zeros just keep coming to the point where they are mind boggling. But does that necessarily mean large banks have the heft to handle any challenges they might encounter? Are they a good choice for investors?
Well, at least in the cases of Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) the answer is a qualified yes. Their fundamentals – the numbers behind the stratospheric figures attached to their financial activities – are for the most part reassuring if not totally stellar.
Hefty dividends and impressive price/book ratios
In selecting stocks, value investors scrutinize, among other things, the size of a company dividend. They feel confident if it is at least two-thirds the interest rate on an AAA bond; 10-year U.S. treasury bonds now return approximately 2.45%.
The dividends offered by JPMorgan Chase & Co. (NYSE:JPM) (2.3%), Bank of America Corp (NYSE:BAC) (2.1%) and Wells Fargo & Co (NYSE:WFC) (2.1%) far surpass this (two-thirds) standard when calculated as a five year average. In fact, their dividends might represent one of the major selling points that any of these three banks enjoy.
In determining its book value, the depreciation a company has accumulated is subtracted from its net asset value. Comparing a firm’s book value to its market value (its price/book ratio) can help to determine if it is overpriced. Value investors become confident when a business’ price/book value does not exceed one. This ratio is taken as being an indication it is not oversold and might even be ready for a bounce as regards its stock price.
Bank of America Corp (NYSE:BAC) has a price/book value that goes beyond that high standard: .74. And JPMorgan Chase & Co. (NYSE:JPM) has posted a figure, 1.08, which does not miss that mark by much. Only Wells Fargo & Co (NYSE:WFC)’s price/book ratio of 1.58 might raise a few eyebrows. However, looking a bit harder at some of its fundamentals, it becomes clear that these numbers might not be as concerning as they first appear.
Its forward trailing P/E ratio for the year ending on Dec. 31, 2014 is projected to be only 11.1, hardly an indication that it is seriously oversold. This figure is less than the average P/E ratio for widely based S&P 500: 15.49.
Beta: a fundamental open to interpretation
A stock's beta measures its volatility relative to that of other stocks. If its beta is 1.00 that stock is volatile to the same degree as is the market as a whole. Any stock whose beta is lower than 1, meanwhile, fluctuates less than the market does, while stocks with betas above 1.00 are more volatile than the market is. If a stock's beta is, for example, 1.80, it is 80% more volatile than the market.
It could be argued Bank of America Corp (NYSE:BAC) (1.92) or JPMorgan Chase & Co. (NYSE:JPM) (1.80) might make wise choices because their betas are relatively high, allowing for upward swings.