JPMorgan Chase (JPM) surprised Wall Street by announcing an 87% cut in its quarterly dividend. The bank will now pay five cents a share each quarter, down from 38 cents a share previously. The company said that this move will allow them to save $5 billion a year.
This move highlights an important factor in my analysis which is a company’s cash flow. Essentially, a business’ cash flow tells us how much a company is making from its business operations versus how much money is needed to fund those operations.
Cash flow isn’t the same as earnings. I’ll give you an example. Let’s say we have two business and they both earned $1 million last year. Yet, one has to spend $700,000 on a new plant this year just to say competitive while the other doesn’t. That’s a big difference.
I have to give JPMorgan Chase some credit. The bank hasn’t yet declared a major earnings loss, and they probably won’t. Still, the outlook for the banking sector is just too murky. JPM has already taken $25 billion TARP funds. On my Portfolio Grader stock-rating tool, I have JPMorgan Chase rated as a Hold.