Capital One Aims To Return $3.3 Billion To Shareholders Over Next Four Quarters

Last week, Capital One (NYSE:COF) detailed its capital plan for 2016 after getting it approved by the Federal Reserve as a part of the annual review of the banking sector (see Lots Of Winners In The Fed’s 2016 Stress Test, But Deutsche Bank, Santander Stumble Again). While the credit card lender chose to retain quarterly dividends at their current level of 40 cents a share, it announced plans for a new $2.5-billion share buyback program. ((Capital One’s CCAR Capital Plan Receives No Objection from the Federal Reserve, Capital One Press Releases, Jun 29 2016)) Given the bank’s slightly over 500 million shares outstanding, this points to Capital One’s intent to return $3.3 billion to investors over the one-year period beginning Q3 2016.

See our full analysis for Capital One here

We maintain our $85 price estimate for Capital One’s stock.  Our price target is about 35% higher than the current market price due to the sharp sell-off in bank shares over recent months in anticipation of the U.K. leaving the European Union.

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 through 2014, but jumped to 40 cents apiece in Q2 2015 and will remain at that level at least until Q2 2017.

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 returns. From 2005 through 2012, the bank paid less than $1.2 billion in total 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 that year. In 2015, the bank announced plans to repurchase $3.125 billion worth of its shares immediately after results for the 2015 stress tests were completed, and by the end of the year also received the Fed’s approval to repurchase an additional $300 million in shares over the first half of 2016. 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, while the Fed approves capital plans over a four-quarter period spread across two fiscal years.

Assuming Capital One’s average shares outstanding for 2016 of around 500 million, its proposed capital plan signifies dividend payouts of roughly $800 million for the year. The bank repurchased $970 million in shares over Q1 2016 and was authorized to repurchase an additional $625 million for Q2 2o16 – taking the total repurchase figure over the first half of the year to just under $1.6 billion. Taken together with $1.25 billion in proposed buybacks for the rest of the year, this points to total share repurchases of $2.85 billion in 2016 – making this 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%. You can understand how a change in the bank’s adjusted dividend payout affects its share value by making changes to the chart.

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1. Capital One Dividend Information [↩]