Capital One Financial (COF -1.95%) is one of the largest banks in the country in terms of assets, with about $363 billion under management as of the end of 2020. While it does have branches, primarily throughout the mid-Atlantic region, it is best known as a credit card issuer. As such, it makes most of its revenue -- about 60% -- from lending money for credit card purchases, generating revenue from interest and swipe fees.
Capital One is the fifth-largest credit card issuer in the U.S., with a market share of roughly 10.5%. It has approximately 62 million credit cardholders. With credit cards making up the bulk of its business, Capital One was hit harder than most banks by the pandemic, but it is also positioned to come back stronger in 2021. Is it a stock you should consider buying?
Back in black
Capital One got saddled with net losses in the first two quarters of 2020, as the pandemic and the resulting shutdowns curbed consumer spending and led the company to set aside billions for potential credit losses due to financial hardships. But as the lockdowns lifted and stimulus checks and other forms of relief were issued, consumer spending slowly increased and the risk of credit losses declined.
Image source: Getty Images.
Capital One was back in the black in the third quarter, and by the fourth quarter it had generated $2.6 billion in net income, or $5.35 per share, up from $1.2 billion in the fourth quarter of 2019. Its provision for credit losses was just $264 million, down from $1.8 billion in the fourth quarter of 2019, $4.2 billion in the first quarter of 2020, and $5.4 billion in the second quarter of 2020.
It also helped earnings that the company was able to reduce non-interest expenses by 3% for the year, mainly due to scaling back on its marketing budget.
The bank ended the year in good financial shape, with a common equity tier 1 (CET1) ratio of 13.7%, up from 12.2% at the end of 2019. Its efficiency ratio was also down, to 52.8% from 54.1% year over year. The lower the efficiency ratio, the better, as it means a bank is spending less to generate income. Capital One's return on tangible common equity also improved, from 11.1% to 25%.
Due to the net losses in the first half of the year, Capital One had to reduce its quarterly dividend from $0.40 per share to $0.10 per share to preserve capital. But in January, it was able to bump the dividend back up to $0.40. The company also announced that it would buy back $7.5 billion in stock this year, with about $500 million in share repurchases in the first quarter.
Sea of green
Capital One came into 2021 with a lot of green lights -- an improving and growing economy, economic stimulus checks and other relief for consumers, and shots in arms. This will lead to lower unemployment, more money in the economy, increased levels of borrowing and investment, and higher consumer spending. Banks, particularly those that issue credit cards, are highly tethered to the direction of the economy, so during a recovery, banks are going to perform well.
Year to date (YTD), banks are among the top performers on the market. The industry has an average return of roughly 26% in 2021, which is better than the larger financial sector and the S&P 500. Capital One is outperforming its peers, up about 34% YTD through Tuesday's close. In addition to the economic green lights it has ahead of it, Capital One is in solid financial shape with a stable CET1 level, excellent liquidity with a liquidity coverage ratio of 145%, and a great efficiency ratio.
It is also available at a low price-to-book ratio a little over 1 and a forward price-to-earnings ratio of 10.4. The first-quarter numbers are due to come out on April 27 and should show continued growth. Capital One is a great buy right now, and it's a good time to get in.
