The Fed’s Stress Test & Capital One: Investors Rewarded With 500% Dividend Hike

Capital One (NYSE:COF) has a mixed history when it comes to paying dividends. After all, the credit-card focused banking group paid 2.7 cents in quarterly dividend for years, till it revised it upwards to 37.5 cents in the last quarter of 2007 – only to slash it to 5 cents in early 2009 in the wake of the economic downturn. ^[1] But now that Capital One has received approval from the Federal Reserve to raise dividends to 30 cents a piece, it can be safely said that the bank is much more confident about its capital strength than it was in the past and is not afraid to hand out more cash to investors. ^[2] The fact that Capital One’s CEO Richard Fairbank, hinted at a possible share repurchase plan being put in place next year also strengthens this conclusion.

See our full analysis for Capital One here

We maintain our price estimate for Capital One’s stock at $62, at a premium of around 15% to current market prices.

The table below summarizes Capital One’s capital return figures for each year since 2007, and has been compiled using figures reported in annual reports:

As seen in the chart above, Capital One has been rather stingy with its capital return policy. Over the six-year period from 2007 to 2012, the bank paid out just over $1.1 billion in dividends – which works out to an average dividend payout of less than $200 million each year. The bank has also never repurchased its shares over the period. In fact, investors in Capital One had to contend with a dilution in their holdings when the bank increased the number of its outstanding shares by 26% (from 460 billion shares at the end of Q4 2011 to 580 billion shares at the end of Q1 2012) to fund its acquisition of HSBC’s card business.

But the fact that the bank has hiked dividends to $0.30 a share should offer some respite to investors. Assuming that the number of outstanding shares remains at current levels, the hike would mean that the bank will spend about $700 million this year as dividend payments – higher than it has ever done in the past.

We represent dividend payouts in our analysis of Capital One in the form of an adjusted dividend payout rate, as shown in the chart below. As this payout rate was not meaningful in 2008, we represent it in the chart as 0%.

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1. Capital One Dividend Information [↩]
2. Capital One Receives No Objection From the Federal Reserve to Raise Common Stock Dividend, Capital One Press Releases, Mar 14 2013 [↩]