Capital One’s $2.5 Billion Share Repurchase Plan Welcome News For Investors

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Capital One Financial

Last week, Capital One (NYSE:COF) detailed its capital plan for 2014 which was signed off by the Federal Reserve as a part of its annual review of the banking sector. The plan entails a $2.5 billion share buyback program to complement the credit card-focused banking group’s 30-cents-a-share in quarterly dividends. [1] This signifies an intent to return almost $3.2 billion to investors over the one-year period beginning Q2 2014 – more than double the $1.5 billion Capital One handed out in FY 2013.

The plan in itself did not quite come as a surprise, given that CEO Richard Fairbank expressed a desire to repurchase shares as a part of the 2014 capital plan as early as last March. ((Capital One Receives No Objection From the Federal Reserve to Raise Common Stock Dividend, Capital One Press Releases, Mar 14 2013)) But the bank had also secured approval for a $1 billion share repurchase plan last June thanks to the sale of its Best Buy card portfolio to Citigroup. Because of this, we expected it to hike dividends by 15-20% and spend around $1.25 billion to buy back its own shares for a total payout ratio of roughly 50% of its estimated net income in FY2014. The actual announced plan represents a payout ratio in the vicinity of 75% this year – great news indeed for investors.

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See our full analysis for Capital One here

We are in the process of updating our $79 price estimate for Capital One’s stock, to factor in the better-than-expected capital plan for 2014.

Capital One has a mixed history when it comes to paying dividends. The banking group paid 2.7 cents in quarterly dividends for years, until it revised them 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. [2] The 500% dividend hike last year was largely unanticipated, and brought dividends to their current level of 30 cents.

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:

(in $ mil) 2005 2006 2007 2008 2009 2010 2011 2012 2013
Common Stock Dividends 28 32 42 568 214 91 91 111 555
Shares Repurchased 3,000 1,000
Total 28 32 3,042 568 214 91 91 111 1,555

As seen in the chart above, Capital One has been rather stingy with its capital return policy. Over the eight-year period from 2005 to 2012, the bank paid less than $1.2 billion in dividends – which works out to an average dividend payout of less than $150 million each year. Moreover, investors also had to contend with 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.

So if 2013 was a rewarding year for investors in Capital One, with the bank returning more than $1.5 billion in cash, 2014 will only be better with the bank aiming to double this figure. Notably, this would also make 2014 the year with the highest payout from Capital One on record. 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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Notes:
  1. Capital One expects to repurchase $2.5 billion of shares of common stock through the end of the first quarter of 2015, Capital One Press Releases, Mar 26 2014 []
  2. Capital One Dividend Information []