Wells fargo or jpmorgan? What is the better purchase?

The major american banks do not all enjoy the same reputation among investors. Although many americans still blame banks like wells fargo (WKN:857949) and jpmorgan chase (WKN:850628) for the 2008 recession and financial crisis,the shareholders who stuck it out through the tough times have been rewarded for their discipline and patience as prices soared to new all-time highs. Wells and also jpmorgan have done particularly well in this regard, leaving many of their competitors behind. But looking at the two shares now, which one is currently the better one to?

In the following, we will take a closer look at how wells fargo and JP morgan chase have fared recently. Then you can decide which one is better for your needs.

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Stock performance and valuation

After a tough period of falling short of the benchmark, the financial sector is finally showing some signs of life in recent months. The returns that the big banks have given their shareholders over the past year have been mixed. JP morgan chase is up 7% since august 2015, while wells fargo is down 7% over the same period.

Despite these differences, however, both shares appear relatively inexpensive by traditional valuation standards. If we look at earnings, jp morgan chase has a price-to-earnings ratio of 11, which is only slightly less than the p/e ratio of 12 at wells fargo. Even if we factor in expected earnings, JP still has a slight advantage with a P/E of 10.5 compared to 11.5 for wells.


The premium that investors are placing on wells fargo is evident in the price-to-book ratio. Wells is trading at a premium of more than 35% on book value, compared to only 5% for JP. Since several large banks are priced favorably just by P/B ratio, these two banks look a bit expensive here. But in many ways, the kbvs also reflect greater confidence in the two banks' balance sheets. JP morgan has a slight advantage over wells in terms of valuation.


Bank stocks took a long time to get their dividends back to where they were before the financial crisis. While some companies are still struggling to get approval to increase their payouts, wells and JP have already brought their dividends back to healthy levels. JP currently stands at 2.9%, wells at 3.1.

In terms of dividend growth, however, JP is more aggressive. The company just increased its dividend by 9%, paying $0.48 per share, which is nearly ten times what it paid out after the financial crisis. In addition, the bank expects to continue massive share buybacks next year, taking advantage of the fed's favorable opinion of the company's capital plan.

In contrast, wells has paid its investors only a half penny more this year and noted in the last conference call that the current payout ratio is 62%. The company tries to keep its payouts between 55% and 75%. But CEO john stumpf has hinted that future dividend increases could be larger. On the other hand, he also said that buybacks would be important and that shareholders could expect a combination of both. All in all, the two stocks have similar dividend and capital return profiles.

Growth prospects and risk

What separates the strong banks from the weak is their ability to recover from adversity, and both wells and JP morgan have done a convincing job of that. But that did not come without difficulties. Wells fargo's second quarter report found a slight decline in net income as the bank has problems with the low interest rate environment and thus cannot generate higher net interest income. But loan growth was impressive and return on equity and assets were well above those of competitors. Challenges in the energy sector have forced wells to raise credit default forecasts. Wells would like to achieve even better results here and is also working to reduce costs and increase profits.

At JP morgan chase, the situation looks even better at the moment. The bank has seen record deposits from consumers as well as strong loan revenue gains and loan growth. CEO jamie dimon said mortgages and commercial real estate are particularly important to JP morgan's current success. The company is also benefiting from the more stable financial markets. JP morgan is also more into investment banking than wells fargo and this circumstance is finally working in jpmorgan's favor after several quarters of uncertainty due to the volatile market environment.

All in all, wells fargo and JP morgan chase are attractive stocks that could benefit from a recovery in the financial sector. JP morgan's slightly lower valuation, higher dividend growth prospects and higher growth opportunities give it a small advantage over wells fargo here, but both have the potential to -provide strong returns in the future.

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Motley fool owns and recommends wells fargo.

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