Fed’s Conditional Approval A Minor Hiccup For Capital One’s Plan To Return $3.3 Billion To Shareholders

by Trefis Team
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Capital One (NYSE:COF) stood out among all bank holding companies (BHCs) that were a part of the Federal Reserve’s annual stress test for being the only one to receive a conditional approval for its capital return plan (see Fed Clears Capital Plans Of All U.S. Banks Subject To Stress Tests For The First Time In Seven Years). While the credit card lender can go ahead with its new plan of maintaining quarterly dividends at the current level of 40 cents a share, and of repurchasing $1.85 billion worth of its shares, it will need to resubmit its capital plan to the Fed by the end of this year. If the Fed finds that Capital One has not sufficiently addressed the deficiencies in its capital planning process, then the regulator may curtail payouts over the first two quarters of 2018.

Given the bank’s roughly 480 million shares outstanding, the new capital plan represents Capital One’s intention to return $2.6 billion to investors over the one-year period beginning Q3 2017 – a 22% reduction from the $3.3 billion capital return target set as a part of the 2016 capital plan. As this is lower than what we expected the bank to hand out over the next twelve months, we are currently in the process of updating our price estimate for Capital One’s stock.

See our full analysis for Capital One here

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. 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 in Q2 2015 and will remain at that level at least until Q2 2018.

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:

COF_QA_CapitalReturn2017

As seen in the chart above, Capital One has been rather stingy with its capital returns. From 2007 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 really 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 for total buybacks in excess of $3.4 billion. In the 2016 stress test cycle, the buyback figure was reduced to $2.5 billion, and it has been reduced further to $1.85 billion under the most recent plan.

Assuming Capital One’s average shares outstanding for 2017 of around 480 million, its proposed capital plan signifies dividend payouts of roughly $760 million for the year. The bank repurchased $218 million in shares over Q1 2017 and was authorized to repurchase an additional ~$300 million for Q2 2o17 – taking the total repurchase figure over the first half of the year to just over $500 million. Taken together with about $900 million in proposed buybacks for the rest of the year (half of the $1.85 billion declared for the next four quarters), this points to total share repurchases of $1.4 billion in 2017.

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. 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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