Is Capital One Financial Stock A Buy?

Capital One Financial Corp (NYSE:COF) is one of the most successful banks in the U.S., thanks largely to a digital-focused reputation. It’s the second-largest car financer in the company a major credit card issuer, and involved in both consumer and commercial banking.

Whether you like its products or not, is Capital One Financial stock a Buy?

The company was involved in the 2008 government bailout of the banking industry and outperformed contemporaries like Wells Fargo and Bank of America in the aftermath. It also outperformed them following the coronavirus pandemic, showing its resiliency.

It started as a credit card company at the turn of the millennium and grew to just below the “too big to fail” banks as the 8th largest U.S. bank. It rose to prominence using information-based technologies to manage its credit card portfolios. Soon it became a full-fledged bank.

Let’s run the books to see if Capital One can write its own checks or if it’ll be a money pit for investors.

What Does Capital One Financial Do?

Although now a full-fledged, vertically integrated bank, 64 percent of Capital One’s total revenue still comes from its credit card segment. In fact, there’s a good chance your first credit card with a Capital One card.

The company is now a component of both the S&P 100 and S&P 500 indices and pioneered mass marketing of credit cards.

Unlike American Express, which has rigid standards for its charge card products, Capital One specializes in helping people with no credit or bad credit gain access to banking services. This helped it earn revenue from a large volume of smaller transactions.

Capital One’s dedication to financial technology helped it fill a gap in the unbanked and underbanked. Approximately 16 percent of Americans are underbanked, and another 5.4 percent are unbanked. This accounts for about 30 million people.

Fintech companies like PayPal, along with cryptocurrency projects like Bitcoin, help these populations gain liquidity. Without access to banking services, it can be hard to get a job, rent an apartment, buy a car, and more.

This is the bread-and-butter of Capital One’s success, although it also serves high-net-worth individuals and corporations now too. But even if you buy its business model, should you buy its stock?

Is Capital One Financial Stock A Buy?

Capital One has a market capitalization around $45 billion with a P/E ratio around 50.00 at the start of 2021. Share prices fell to a 52-week low of $38.00 during the coronavirus crash. It then rebounded to pre-pandemic trading levels around $100.00 per share.

The company continued its quarterly dividend payments through the pandemic, although it lowered the payout from $0.40 to $0.10 midway through the year. This gave it an annual dividend of $1.00 for 2020 and an expected payout of $0.40 for 2021.

Its third quarter 2020 earnings report in late October showed net income of $2.4 billion, or $5.06 per diluted share, up from $1.3 billion in the same quarter of the previous year. This is after paying $80 million over its culpability in a 2019 cyberattack, of which insurance covered $74 million.

Capital One also reported a net loss of $918 million the previous quarter when it had to shore up cash to cover potential losses. It was the second consecutive quarter of losses, with $1.3 billion lost in the first quarter. The bank allocated $2.7 billion for pandemic relief, and $2.7 billion to cover default losses.

That highlights potential risks of investing in Capital One during these uncertain economic times.

Risks of Buying Capital One Financial Stock

The coronavirus pandemic greatly impacted the economy. Unemployment reached record highs while businesses shut down across the country and world. When times get tough, people lean on credit cards and may get delinquent.

As of the end of 2020, there’s no known jump in credit delinquency. In fact, credit card debt declined following the pandemic, but the country also had a year of government stimulus relief. Without this financial aid, it’s unclear how well people will keep up with their bills.

In fact, some people fell into credit card debt in the final two months of the year. A lack of stimulus extension and the holiday season triggered a need to put both bills and holiday expenses on credit cards.

Still, Capital One passed the Fed’s stress tests to ensure its liquidity in the event of a run on the bank. While the bank as risks, they’re relatively mild compared to its bigger competitors.

Can Capital One Financial Competitors Win?

Capital One has a lot of competition in 2020, with companies like Discover, American Express, Citi, and Ally Financial. These companies are known for their wide credit card footprints. And it’s also involved in consumer banking and auto lending.

This puts the company at odds with major banks, like JPMorgan, Wells Fargo, and Bank of America. And all of these companies have competition from fintech projects designed to help the unbanked and underbanked.

Both Bitcoin and PayPal outperformed Capital One in 2020, and Capital One outperformed most banks. This shows the paradigm shift caused by the coronavirus pandemic. It accelerated a shift away from banks to independent digital money companies.

Capital One has a long battle ahead of it to stay relevant among both traditional banks and mobile alternatives.

Is Capital One Financial Stock a Buy? The Bottom Line

Capital One started a charge to the credit card industry. It aggressively markets its credit card products to the masses, and pretty much anybody can get at least a secured card through the bank. But it’s more than a credit card company; it’s a full-fledged bank.

This gives it all the good and bad that comes with being a financial institution during a pandemic.

It passed a federal stress test and has money put aside to cover losses. What it doesn’t have is much of a defense against fintech competitors and cryptocurrency. Still, it takes less regulatory heat than banks like Wells Fargo. It won’t be the first bank to fail.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.