Capital One Financial's (COF 3.91%) stock price is up over 2,600% since it came public in late 1994. Given that level of performance, it's fair to say that this financial company's stock has the potential to be a key element in a millionaire-making portfolio over the long term.
But investors interested in Capital One need to understand that the big rewards here also come with big risks.
Capital One Financial isn't your ordinary bank
From a big-picture perspective, Capital One is a bank. But it has a rather limited branch network compared to peers, instead preferring to do as much business as possible online. On the surface, that might seem like a good thing, because consumers are increasingly comfortable operating in a digital-only world. But this focus hints at Capital One's unique business model.
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Unlike most banks, Capital One is heavily focused on credit cards and other loans. To put that into perspective, the $961 million in income the company generated in the first quarter of 2024 from its credit-card operations was more than it generated from its consumer banking ($381 million) and investment banking ($280 million) activities combined. And even on the banking side, loans are a key factor, including in higher-risk segments like auto loans.
This is not your typical bank stock, and investors should tread with caution when comparing it to more diversified banks. It just isn't an apples-to-apples comparison.
Big risks, big rewards, and big drawdowns
Given the share-price advance over time, however, you might believe that Capital One's more aggressive business approach isn't such a bad thing. Clearly, it has worked out well so far, but you are also looking at the stock's performance at a time when investors are in a strongly bullish mood. Indeed, the S&P 500 index is near all-time highs right now.
Lending money to higher-risk borrowers, which is a key focus of Capital One's approach, can be highly profitable in the good times. But the downside can be painful when economic activity slows, which is why you need to pay attention to what happens to Capital One during the bad times. As the chart below highlights, drawdowns can be swift and painful as investors dump the stock when economic uncertainty rises. And those pullbacks happen fairly regularly.
Then there's the dividend, which has a long history of getting cut during difficult periods. To be fair, the dividend payment has trended higher over time. But if you are looking for a reliable income stream, Capital One isn't going to provide that. The payout also seems likely to be cut right when you most need it, i.e., during periods of economic weakness. The dividend yield is a fairly tiny 1.6%, so this is hardly an income stock. However, the dividend variability highlights the inherent business risk here.
None of this is meant to suggest that Capital One is a bad company. However, it is a risky company, and that's by design. Over the long term, the rewards of this approach have been worth it. That's likely to be the case in the future as well. But it requires a strong stomach to ride the peaks and valleys along the way because the bad times tend to hurt more here than they do at other banks.
Maybe hold off on Capital One
So is Capital One a millionaire-maker stock? Maybe, but it would require a huge amount of risk tolerance to own it outside of a well-diversified portfolio. Meanwhile, if you buy it today, with the stock "only" about 18% below its all-time highs, you are probably paying at least full fare. Indeed, 40% drawdowns are pretty common and that level would likely represent a better buying point. Of course, buying then would require a contrarian stance, so you should prepare today by putting Capital One on your wish list ... but only if you are a more aggressive investor with a long-term focus.
