Capital One Shares Jump 4% After Plans To Return $4 Billion To Shareholders

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COF: Capital One Financial logo
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Capital One Financial

Capital One (NYSE:COF) detailed its capital plan for 2015 late this Wednesday, March 11, after getting it approved by the Federal Reserve as a part of the annual review of the banking sector. The plan entails a 33% hike in quarterly dividends for the card-focused banking group from $0.30 to $0.40 a share, and also includes a $3.125-billion share buyback program. ((Capital One’s CCAR Capital Plan Receives No Objection from the Federal Reserve, Capital One Press Releases, Mar 11 2015)) This points to Capital One’s intent to return $4 billion to investors over the one-year period beginning Q2 2015 – a 25% increased from the $3.2 billion in shareholder payout that Capital One announced at the end of the stress test last year.

Notably, the bank’s proposed quarterly dividend figure is the highest in its history – surpassing the 37.5 cents it paid out shortly before the economic downturn of 2008. Investors expressed their happiness to this announcement by leading Capital One’s shares 4% higher over trading on Thursday.

See our full analysis for Capital One here

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We maintain our $89 price estimate for Capital One’s stock, as the announced capital plan is largely in-line with what we expected.

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 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] The 500% dividend hike in 2013 was largely unanticipated, and brought dividends to 30 cents a share. They remained at that level over 2014, and will jump to 40 cents apiece for the current quarter once the bank’s board clears this move in April.

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 2014
Common Stock Dividends 28 32 42 568 214 91 91 111 555 679
Shares Repurchased 3,000 1,000 2,000
Total 28 32 3,042 568 214 91 91 111 1,555 2,679

As seen in the chart above, Capital One has been rather stingy with its capital returns. 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.

It was only in 2013 that Capital One began rewarding shareholders with cash – first hiking its dividends and then using proceeds from the sale of its Best Buy card portfolio to Citigroup to get a $1-billion share repurchase plan approved by the Fed. Although the bank maintained dividends at the same level over 2014, it sought to repurchase shares worth $2.5 billion last year. It should be noted that the discrepancy in the buyback plan announced from the figure shown in the table above stems from the fact that these figures represent payouts over a calendar year, whereas the Fed clears capital plans for a one-year period beginning from the second quarter of a year.

Assuming that Capital One’s shares remain constant around the current figure of 550 million, its proposed capital plan signifies dividend payouts of roughly $880 million in 2015. Taken together with the $3.125 billion share repurchase program, this means that Capital One is looking to return $4 billion in cash to investors. Adjusting for the difference in time period as we explained above, the actual payout for the year 2015 should be between $3.7-$3.8 billion – making 2015 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 Dividend Information []