J.P. Morgan Versus Wells Fargo on Share Buybacks

This has been an interesting year when it comes to health of the banks. Wells Fargo & Co. (NYSE: WFC) is now the defacto healthiest of the 7 safest banks in America. That was no easy determination because J.P. Morgan Chase & Co. (NYSE: JPM) was the biggest and has that fortress balance sheet. After a share buyback announcement yesterday, we are taking a look at which bank actually can buy back its shares of common stock over the next year or so.

On Tuesday came word that Wells Fargo’s board of directors approved its $0.22 dividend but also that the board increased its authority to add 200 million more shares to its common stock repurchase plan. The bank already repurchased approximately 17 million common shares in third-quarter 2012 and an additional estimated 9 million shares through a forward repurchase transaction expected to settle in fourth quarter 2012. At the same time, Warren Buffett of Berkshire Hathaway Inc. (NYSE: WFC) said that he has yet again added to his massive holdings of Wells Fargo. While those shares are not retired and while dividends still have to be paid on those shares (unlike repurchased and retired shares), Buffett’s shares might as well be the next best thing to a bought-back share because it is unlikely to be thrown back into the free-float.

What is so interesting about J.P. Morgan Chase is that the giant bank suspended its share repurchase program in the wake of the London Whale losses. The bank could easily absorb that loss, but the pressure is on for banks to hold capital now unless it is absolutely free and clear capital that will not be needed for any future reserves. The London Whale losses are now effectively all but over. In the latest earnings conference call, Jamie Dimon did say that he thinks the bank should be able to buy back a substantial amount of its common stock in 2013 and still meet its Basel III capital requirements. As of the end of April, Dimon had spent about $1.3 billion buying back common stock out of what was a new $15 billion buyback plan.

Wells Fargo effectively said it would be allocating almost $7 billion more to repurchase shares, if you use prevailing market prices. J.P. Morgan has a massive amount of stock that it can buy back that is even larger, but Dimon is effectively still somewhat under scrutiny and he may have to wait for the outcome of the election before he makes any major moves on this front.

JON C. OGG