Capital One (COF) Dividend at Pre-COVID Level: Worth a Look?

Last week, Capital One COF restored its quarterly dividend to pre-COVID-19 levels. The company announced a quarterly cash dividend of 40 cents per share, up 300% from the prior payout. The dividend will be paid out on Mar 1 to shareholders of record as on Feb 17.

The development cheered investors and Capital One’s shares hit a new 52-week high of $115.53 at the very beginning of trading session on Feb 5.

Shares of the company closed the day’s session at $114.48, reflecting a robust year-to-date gain of 15.8%. Over the same time frame, the industry and the S&P 500 Index rallied 11.4% and 4%, respectively.

Year-to-Date Price Performance


Last year, the Federal Reserve had restricted capital distribution for major financial companies including Capital One, JPMorgan JPM, Bank of America BAC, Goldman Sachs GS and Morgan Stanley in order to preserve liquidity amid coronavirus-related ambiguity. The central bank had suspended share repurchases and capped dividend payments in a way that the firms can either pay dividend equal to the amount paid in the second quarter of 2020 or according to a formula based on the recent income.

Thus, based on these requirements, Capital One had to slash its quarterly payout to 10 cents per share for the third and fourth quarters of 2020, as it incurred losses in the first half of 2020. The losses were mainly attributable to deterioration in asset quality, lower interest rates and fall in consumer loan demand.

Nonetheless, Capital One returned to green in the last two quarters of 2020 driven by rise in consumer spending and reserve releases as economic backdrop improved gradually. This resulted in improvement of 150 basis points year over year in the company’s common equity Tier 1 capital to 13.7% as of Dec 31, 2020.

Notably, the company CEO Rich Fairbank during the fourth quarterearnings conference callhad stated, “Following the latest stress-test results released by the Federal Reserve last month, and in light of the strong capital position I just described, we expect to restore our quarterly dividend back to $0.40 per share in the first quarter, pending board approval.”

Additionally, Capital One authorized a new share buyback program of up to $7.5 billion for 2021, with $500 million for the first quarter. Hence, based on earnings strength and solid liquidity position, the company’s current actions look sustainable.

While Capital One stock seems to be an attractive investment option right now based on enhanced capital deployments, let’s check its fundamentals to clearly understand its risks and rewards.

Revenue prospects look encouraging on the back of Capital One’s solid credit card and online banking businesses. The company’s top line witnessed a five-year (2016-2020) compound annual growth rate (CAGR) of 2.8%, driven by steady loan growth and opportunistic acquisitions over the past years. Further, given a strong balance sheet position, the company is well poised to continue expanding inorganically. While revenues are expected to remain relatively stable this year, the same is projected to grow 4.8% in 2022.

Further, Capital One’s robust balance sheet and liquidity position is expected to help it meet debt obligations in the near term, even if the economic situation worsens. The company’s times interest earned of 4.4X at the end of the fourth quarter of 2020 improved sequentially.

Capital One witnessed earnings decline of 9.6% over the past three-five years. However, its earnings are projected to surge 129.9% and 22.1% for 2021 and 2022, respectively. Also, the Zacks Consensus Estimate for earnings for 2021 and 2022 has been revised upward over the past 30 days. This indicates that analysts are optimistic regarding the company’s earnings growth potential.

Additionally, Capital One sports a Zacks Rank #1 (Strong Buy). Further, it belongs to the Zacks Consumer Loans industry, which currently carries a Zacks Industry Rank #47 (placing it at the top 19% of more than 250 Zacks industries).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Thus, based on the above-mentioned factors, the stock seems worth investing in. However, margin pressure due to near-zero interest rates remains a major concern for the company. Further, Capital One’s asset quality has been deteriorating and is likely to remain under pressure in the near term.

Also, mounting operating expenses might hurt the bank’s bottom line to some extent in the near term. Therefore, one must consider these downsides as well before taking any decision.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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