Dimon made a rare statement on Investor Day, announcing that the company would limit stock buybacks at high prices. His candid attitude not only dampened J.P. Morgan's share price, but also warned other business leaders.
“We're not going to buy back a lot of shares at these prices,” J.P. Morgan CEO Dimon told participants at the bank's Investor Day event.
J.P. Morgan CEO Dimon's candid remarks about share buybacks on Monday are rare for business leaders, but they should get the attention of other business executives.
At the company's Investor Day event, Dimon said that due to the high price of J.P. Morgan Chase (JPM.N) shares, the company will restrict share buybacks.
“We're not going to buy back stocks in large quantities at these prices,” Dimon told Investors' Day attendees. J.P. Morgan's stock has risen about 45% over the past year and recently hit a record high.
“Our approach is very, very consistent,” Damon said. “When stocks rise, we buy less, and when stocks fall, we buy more,” he added.
With the exception of Warren Buffett, few CEOs publicly supported Damon's views.
Companies usually buy back shares regardless of price. why? CEOs may actually believe their shares are undervalued even when they're expensive, or they're concerned about the impact of reducing or cancelling buyback programs on share prices.
The risk is paying too high a share price. Companies from Charter Communications to Hertz Global Holdings have bought back shares at prices far above current transaction prices.
More companies should like J.P. Morgan Chase and prefer dividends over share buybacks when stock prices are high.
Dimon's comments were consistent with remarks made during the company's April earnings call, causing J.P. Morgan's stock price to fall. The stock price fell 4.5% in the same day's trading to close at $195.58.
Another negative news from the Investor Day event was that Damon, 68, hinted that he would leave his job earlier than previously anticipated. “The timeline isn't five years anymore,” he said.
J.P. Morgan Chase has been buying back shares in moderation, and tends to return cash to shareholders through dividends rather than share repurchases. J.P. Morgan recently repurchased $2 billion of shares every quarter, accounting for about 1.5% of its $563 billion market value.
The company pays more annual dividends (about $13 billion) than the current annual repurchase amount of $8 billion. With a dividend yield of 2.3%, the bank raised its payout twice in the past year and now pays out $1.15 quarterly dividends.
Dimon's monopoly approach has recently affected investor sentiment. In his preview of J.P. Morgan Investor Day, Wells Fargo analyst Mike Mayo wrote, “The investors we spoke with questioned whether they should buy J.P. Morgan shares when the CEO talks about the economy, the stock market, repurchases, and even J.P. Morgan's own shares.”
Long-term holders have little to complain about. J.P. Morgan's stock has outperformed its peers and the S&P 500 over the past five years, and recently traded at a record price of $205. Including dividends, the stock has had an average annual return of 15.6% over the past five years, compared to 15% for the S&P 500 and 9.2% for its main competitor Bank of America.
J.P. Morgan is one of the few large banks to surpass this index since 2019. The stock's return over the past year was 45%, the same as its peers.
Berkshire CEO Buffett took a similar approach to Damon.
“We never think Berkshire shares can be bought back at any price. I emphasize this because US CEOs have an embarrassing record of investing more corporate capital in buybacks when stock prices rise, and less when prices fall. We're doing the opposite,” Buffett wrote in the company's 2020 annual letter.
Berkshire adjusted its share buybacks, buying back a large number of shares in 2020 and 2021, when stock prices were low, at around $25 billion a year, compared to less recent repurchases. Berkshire's total buybacks last year were $9.2 billion, compared to $2.6 billion in the first quarter of this year.
Big tech stocks, for example, continue to emphasize share buybacks. Apple recently raised its annual buyback program from $90 billion to $110 billion, which was warmly welcomed by investors. Currently, Apple's stock price is 191 US dollars, which is about 30 times the profit forecast for the current fiscal year. Therefore, it is questionable whether this 110 billion US dollars is the best use of Apple's profits.
In a recent earnings call, Apple Chief Financial Officer Luca Mestri said the increased buybacks reflect “our continued confidence in our current and future business.”
Apple's dividend is only 0.5%, and the total dividend paid each year is $15 billion, which is only a fraction of the total share repurchases. Arguably, Apple and some of its tech peers, including Meta Platforms (META.O) and Alphabet (GOOGL.O), should allocate more money to dividends rather than share buybacks when their shares approach historic highs. After Meta and Alphabet started paying dividends this year, the dividend yield is now 0.5%.
Stock buybacks are very common in tech stocks and don't seem to take valuation into account. The software company Snowflake (SNOW.N), which is valued at more than 150 times the profit, has a $2 billion repurchase plan. Amazon (AMZN.O) Amazon's extraordinary stock performance despite not having a buyback plan.
Dimon doesn't even agree with the idea that a buyback is equivalent to a return to shareholders. “We don't think of share buybacks as returns to shareholders. It's a cashback to shareholders who quit. We want to help existing shareholders,” Dimon said Monday.