While bank stocks are cyclical, they have generated significant wealth for long-term shareholders. Due to an asset-light model, earnings for the banking sector widen at a consistent pace during periods of economic expansion. Further, several big banks also pay shareholders a dividend, allowing investors to create a passive income stream in the process.
In the last 20 years, Royal Bank of Canada (TSX: RY) has returned over 800% to shareholders after adjusting for dividends. Comparatively, JPMorgan (NYSE: JPM) stock has surged 641% in this period. Let’s see which of the two bank stocks is a better buy right now.
The bull case for JPMorgan stock
JPMorgan crushed Wall Street estimates in the fourth quarter (Q4), despite an uncertain macro environment. In fact, the big bank has now beaten consensus earnings estimates for six consecutive quarters, showcasing its ability to navigate challenging economic conditions.
JPMorgan and its banking peers south of the border shored up their balance sheets soon after the financial crisis in 2008-09. Similar to other banks, JPMorgan also saw a massive influx in deposits during the COVID-19 pandemic on the back of fiscal spending and an uptick in household savings.
JPMorgan ended 2023 with more than US$1.4 billion in cash, providing it with the flexibility to expand its loan book or increase its liquidity reserves. JPMorgan and other bank stocks experienced a strong rally in the last quarter of 2023 on the possibility of multiple interest rate cuts in 2024. Alternatively, an economic downturn might pressure the financials of the banking sector in the near term.
JPMorgan was forced to cut its quarterly dividends by 87% to just US$0.05 per share in 2010. It now pays shareholders a quarterly dividend of US$1.05 per share, indicating an annual growth rate of more than 25%, which is exceptional.
With a forward yield of 2.5%, JPMorgan stock may not seem all that attractive to income-seeking investors. However, priced at 10.7 times forward earnings, the banking giant trades at a discount of more than 10% to consensus price target estimates.
The bull case for Royal Bank of Canada stock
RBC has a dividend yield of 4.14%, much higher than JPMorgan. Moreover, while most U.S. banks had to lower or suspend dividends during the financial crisis, RBC and its Canadian peers could maintain these payouts with relative ease.
The Canadian banking sector is heavily regulated, allowing RBC and other TSX big banks to enjoy entrenched positions in Canada. However, while RBC and other Canadian banks might not grow at a similar pace compared to U.S. banks, a conservating lending policy allows domestic lenders to thrive across market cycles.
Priced at less than 12 times forward earnings, RBC trades at a similar valuation to JPM. It is also priced at a discount of 5%, given consensus price target estimates.
The Foolish takeaway
It’s quite difficult to choose a winner between the two companies. Investors looking for a blue-chip dividend stock can invest in RBC, while those who aim to generate higher returns in terms of capital gains can opt for JPM.
You can also consider gaining exposure to both the banking heavyweights that remain positioned to derive outsized gains in 2024 and beyond.
