It's a story that hasn't gotten a wholelot of press recently,
but U.S. banks are doing well.
Wells Fargo (
shares hit an all-time high on July 8. The other three large U.S.
banks are also on the rise:
is up 25%,
Bank of America (
is up 14%, and
JPMorgan Chase (
is up 24%.
The reason?Put simply, banks makemoney by borrowing at a low rate
and lending at a high rate. The rates being offered for the
averagesavings account are next to nothing these days. Yet banks
are able to turn around andissue loans to businesses and
individual customers for rates of 4% to 5%. This difference is
called the interest rate spread. On top of that, banks are able
toloan many times the amount of money they are required to keep
in reserve. This use ofleverage maximizes profits even
Ever since the financial crisis, lending has been on the rise.
And when the money flows, banks get rich.
As you can see in this chart showing the total loans and leases
of U.S. commercial banks over the past five years, lending levels
are now surpassing the same $7.3 trillion mark reached just
before the financial crisis.
StreetAuthority expert Michael Vodicka pointed out in a recent
article thatWarren Buffett has been stocking up on financial
stocks: "Buffett was busy loading up on shares of Wells Fargo
between January and March, closing thisyear 's first quarter with
460 million shares, up 4% from last year and his biggest holding
with a 20% allocation.
"But while Buffett has been accumulating shares of Wells Fargo
for years, he initiated a new position in another bankstock
during the first quarter. Berkshire Hathaway disclosed ownership
of 50 million shares of
U.S. Bancorp (
, Berkshire's seventh-largest holding with a 2.6%
While all the aforementioned companies deserve a closer look,
today I'd like to tell you about another financial stock that is
selling for what I think is a bargain price and just announced a
$1 billion share buyback program.
Although it doesn't often get the same kind of press as the "big
four" banks mentioned above,
Capital One Financial (COF)
is actually the seventh-largest bank in the U.S. bydeposits .
On July 2, Capital One received Federal Reserve approval to
repurchase up to $1 billion of its own shares. The bank plans to
start buying the shares later this year and complete the buyback
by the end of next year's first quarter.
Capital One currently has 561 millionshares outstanding , which
at today's prices bring the total value to roughly $36.9 billion.
So $1 billion worth of share repurchases won't have a huge impact
on the current value of shares.
But what is more important here is that Capital One is making an
effort to increase shareholder value. It's also worth noting that
companies often repurchase shares of their own stock when
management believes those shares areundervalued .
Earlier this year, there was more good news for Capital One
On May 2, Capital One raised itsdividend to 30 cents a share from
5 cents. This marked its first dividend increase since the
financial crisis. Thecurrent yield stands at 0.7 %, butanalysts
at Morningstar forecast a projectedyield of 1.8% in the near
With a price-to-book ratio of 0.9, Capital One's shares are
currently trading belowbook value ; compare that with the
industry standard of close to 3 times book value. Capital One's
trailing 12-month price-to-earnings (P/E ) ratio of 11 is almost
half of its competitor's average of 21, and its forward P/E is
even cheaper at 9.4.
As for the future, Capital One looks to be in a very strong
position. To keep things simple, it may be best to look at the
three main business segments -- credit cards, consumer banking
and commercial banking -- separately. Credit cards represent 40%
ofrevenue , consumer banking 40% and commercial banking the
The company'scredit card segment was bolstered in 2012 when
Capital One acquired HSBC's $30 billion credit card portfolio.
This transaction made Capital One one of the top five credit card
issuers in the world.
In 2012 Capital One's banking division acquired
ING Direct's (ING)
entire U.S. operations. The deal added 7 million customers and
$83 billion in additional deposits to the banks' portfolio. The
deal also jump-started Capital One's automobile lending -- up an
astonishing 24% in 2012 alone.
Finally, the commercial and industrial lending segment is also
showing growth -- up 13% in 2012.
In spite of its recent acquisitions, Capital One carries
virtually nodebt and is gushingfree cash flow . In this year's
first quarter, Capital One reported free cash flow of $2.5
billion, nearly double its $1.3 billion in the same period last
Risks to Consider:
Financialstocks have been surging in part due to the recovery
in housing. Although housing prices continue to rise, weakness in
the sector would be a drag for banks.
Action to Take -->
Capital One is a solid, growing business selling at a bargain
price. I think Capital One's fortressbalance sheet and recent
success indicate that this company's best days are still ahead. I
rate it a buy for long-term investors at today's prices.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.