Thursday, April 5, 2012

Jamie Dimon's 2011 Annual Shareholder Letter

In his latest letter to the shareholders of Berkshire Hathaway (BRKa), Warren Buffett had this to say about the CEO of J.P. Morgan ((JPM), Jamie Dimon:

One CEO who always stresses the price/value factor in repurchase decisions is Jamie Dimon at J.P. Morgan; I recommend that you read his annual letter.

Recently on CNBC, he also was very complimentary of Jamie Dimon's annual letter and said he owns some J.P. Morgan shares personally.

Well, Jamie Dimon's 2011 letter to J.P. Morgan shareholders was just released and it is a very good one.

Some excerpts from Dimon's latest letter:

$ 1.8 Trillion of Capital and Credit
During 2011, the firm raised capital and provided credit of over $1.8 trillion for our commercial and consumer clients, up 18% from the prior year.

On Buybacks and Dividends
We also bought back $9 billion of stock and recently received permission to buy back an additional $15 billion of stock during the remainder of 2012 and the first quarter of 2013. We reinstated our annual dividend to $1.00 a share in April 2011 and recently announced that we are increasing it to $1.20 a share in April 2012.

J.P Morgan's Stock
Normally, we don't comment on the stock price. However, we make an exception in Section VIII of this letter because we are buying back a substantial amount of stock and because there are many concerns about investing in bank stocks.

It Could Have Been Much Better
Recently, we have begun to achieve modest economic growth around the globe, somewhat held back by certain natural disasters such as the tsunami in Japan. But I have no doubt that our own actions – from the debt ceiling fiasco to bad and uncoordinated policy, including the somewhat dramatic restraining of bank leverage in the United States and Europe at precisely the wrong time – made the recovery worse than it otherwise would have been. You cannot prove this in real time, but when economists 20 years from now write the book on the recovery, it may well be entitled, It Could Have Been Much Better.

A Stronger System
There also should be recognition that the whole system is stronger. Accounting and disclosure are better, most off-balance sheet vehicles are gone, underwriting standards are higher, there is much less leverage in the system, many of the bad actors are gone and, last but not least, each remaining bank is individually stronger.

Best and Highest Use of Capital
Our best and highest use of capital (after the dividend) is always to build our business organically – particularly where we have significant competitive advantages and good returns. We already have described many of those opportunities in this letter, and I won’t repeat them here. The second-highest use would be great acquisitions, but, as I also have indicated, it is unlikely that we will do one that requires substantial amounts of capital.

More on Buybacks
If you like our businesses, buying back stock at tangible book value is a very good deal. So you can assume that we are a buyer in size around tangible book value. Unfortunately, we were restricted from buying back more stock when it was cheap – below tangible book value – and we did not get permission to buy back stock until it was selling at $45 a share.

Our appetite for buying back stock is not as great (of course) at higher prices.

Dimon does also say that they plan to buy back the amount of stock that we issue every year for employee compensation because "we think this is just good discipline".  I find that to be a bit disappointing but the statement that follows provides some reassurance they won't do that kind of thing at any price:

Rest assured, the Board will continuously reevaluate our capital plans and make changes as appropriate but will authorize a buyback of stock only when we think it is a great deal for you, our shareholders.

The statements "our appetite for buying back stock is not as great" and "will authorize a buyback of stock only when we think it is a great deal" should be the norm among CEOs but that kind of discipline is far from a given.

Adam

Established long positions in BRKb and JPM at less than recent market prices

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