Stock Analysis & Ideas

Capital One Stock Looks Like a Bargain

The first thing that comes to mind when you think of Capital One (COF) is probably “what’s in your wallet?” instead of the stock. However, at an attractive valuation, a small but growing dividend payout, and a robust share buyback program in an environment where high-multiple stocks are suffering drawdowns means that Capital One stock warrants some more attention as a sensible Buy right now.  I am bullish on COF stock.

Business Description 

Capital One is a $65 billion financial services company based in Virginia. It primarily operates in three main business segments: Credit Cards, Consumer Banking, and Commercial Banking.

Within these business lines, the company has significant auto loan and mortgage businesses. Credit cards are by far the largest and most important part of the business, accounting for nearly 60% of revenue. The company was founded in 1988 and does business in the United States, Canada, and the United Kingdom. 

Valuation

Capital One is attractively valued, especially in today’s market of elevated P/E and P/S multiples. The company trades at a paltry price to earnings multiple of just 5.6 and a forward P/E of just under 8. 

Looking at price-to-book value, a metric commonly used to value banks and other financial sector stocks, Capital One trades at just 1.01x book, which is also compelling. The book value is essentially what you would get if you liquidated all of the company’s assets today and gave it no credit for anything else, so Capital One is trading at just a 1% premium to that rock-bottom measure.

For comparison, two of Capital One’s closest peers, Discover Financial Services (DFS) and Synchrony Financial (SYF) trade at 2.8x and 2x price to book, respectively. 

Part of the reason for this cheap valuation may be concerns over a slight rise in chargeoffs and delinquencies along with the emerging threat of buy now pay later (BNPL) options (see below for risks section), but at these levels, these risks appear to already be priced into the stock. 

Returns to Shareholders  

Capital One sports a dividend yield of about 1.6%. The company had cut the dividend to $0.10 a quarter for two quarters during the height of the COVID pandemic in 2020, but quickly restored the dividend to $0.40, and last quarter increased the payout by 50% to $0.60, so I like the direction COF is going with payouts.

Furthermore, the company is returning capital to shareholders via share buybacks. The company is currently authorized by the board to repurchase up to $7.5 billion worth of shares, which is over 10% of the current market cap.   

Wall Street’s Take

Turning to Wall Street, Capital One has a Strong Buy consensus rating, based on 11 Buys and two Holds assigned in the past three months. At $191.08, the average Capital One Financial price target implies 26.7% upside potential.

Risks 

It’s possible that Capital One is trading at such low valuation multiples because investors are concerned about chargeoffs increasing as stimulus spending ends.

This is certainly a possibility, but I would argue that it could also be a positive for Capital One or at least a net neutral as without stimulus payments, individuals are more likely to use their credit cards for spending than they were when they were receiving a direct influx of money from the government. 

Another risk is the rise of buy now pay later (BNPL) options like Affirm (AFRM). However, these are relatively new entrants into the market, and it remains to be seen how much impact they will have on the space in the long term.

At these levels, it seems this risk is already priced into the shares. For comparison, it seems like a safer bet to own Capital One at 2.3x sales than Affirm trading at 33x sales, even after its recent drawdown. 

Longer-term, the rise of crypto and decentralized finance could pose a threat to legacy lenders and financial institutions, but this is further on the horizon and would be difficult to quantify at this point in time. 

Looking Ahead

While I don’t think that Capital One will be the sexiest investment or the next multi-bagger, I view it as a good safe-haven investment trading at a low valuation against the current regime where high-multiple stocks are being punished. Between multiple expansion, earnings growth, share repurchases, and the dividend, Capital One offers investors multiple ways to win.

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Disclosure: At the time of publication, Michael Byrne did not own shares of Capital One.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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