Capital One: What's In Your Portfolio?

9/23/2013


  Recent Price
$69
  Dividend
$1.20
  Yield
1.7%
  P/E Ratio
9
  Shares (millions)
589
  52-Week Price Range
$70.00 - $50.21

Capital One Financial ($69; COF) owes its genesis to a pair of management consultants who set out in the 1980s to tailor the credit card to the idiosyncrasies of its user. The plan went beyond identifying consumers who want kittens on their credit cards. Rather, the consultants tinkered with variables — interest rates, credit lines, and awards — in the hope of balancing the risks against the fees and interest collected. Along the way, they pushed credit cards into the wallets of a wider swath of U.S. consumers.

Today, Capital One stands to benefit as customers rediscover their appetite for debt. Its shares can fluctuate with ebbs and flows of the housing market, unemployment rate, and consumer confidence. But while the pictures may shift from month to month, all three of those drivers have improved over the last couple years. Capital One, which has returned 6% since we added it to the Buy and Long-Term Buy lists earlier this month, is joining the Focus List.

Business breakdown

Capital One reported 15% higher sales in the first half of 2013, driven by 28% growth from its credit-card business, which benefited from market-share gains and a key acquisition. Besides credit cards (62% of revenue in the first half of 2013, 54% of net income), Capital One offers consumer banking (28%, 32%) and commercial banking (9%, 15%).

Consumer debt accounts for 79% of Capital One's $191.5 billion loan portfolio, with the remainder coming from commercial clients. The consumer portfolio consists of mostly home loans, credit-card receivables, and auto loans. Capital One also holds deposits of $209.9 billion.

Capital One has pounced on assets held by distressed European banks in the past two years. In February 2012, Capital One acquired the online-banking business of the Netherlands' ING Groep ($12; ING). The $8.9 billion deal boosted Capital One's deposit base by about $84 billion, moving the company into fifth place among U.S. banks. Two months later, Capital One paid $31.2 billion for the U.S. credit-card unit of London-based HSBC ($55; HBC). The 9% premium to the face value of the loans was fairly low by historical standards.

Meanwhile, profit estimates drift higher. Earnings per share are projected to decline 12% in the September quarter, hurt by lower loan balances from the sale of Best Buy's ($39; BBY) loan portfolio and the run-off of some mortgages and card loans acquired from ING. Full-year earnings are expected to jump 12% to $6.88 per share. At 10 times estimated 2013 earnings, Capital One shares trade 9% below the industry median.

Before the financial crisis, Capital One's quarterly dividend topped out at $0.375 per share. In May, the company hiked the quarterly payout to $0.30 per share from $0.05 per share.

Capital One won approval from U.S. regulators to repurchase $1 billion of its stock in 2013, about 2.5% of outstanding shares. Combining dividends and stock buybacks, Capital One has promised a 2014 payout ratio "well above" industry norms.

An annual report for Capital One Financial Corp. is available at 1680 Capital One Drive, McLean, VA 22102; (703) 720-1000; www.capitalone.com/about.

CAPITAL ONE FINANCIAL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '13
2.07
vs.
0.33
7%
63.63
-
52.34
11 - 9
Mar '13
1.92
vs.
2.92
23%
62.92
-
50.21
9 - 7
Dec '12
1.42
vs.
0.89
36%
61.83
-
54.45
10 - 9
Sep '12
2.03
vs.
1.88
36%
59.74
-
52.88
10 - 9
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
23.18
6.54
0.53
61.83
-
43.12
9 - 7
2011
18.53
7.03
0.20
56.26
-
35.94
8 - 5
2010
18.94
6.68
0.20
47.73
-
34.03
7 - 5
2009
15.89
0.98
0.20
42.90
-
7.80
44 - 8
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
96
91
65
53
88
66

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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