What This CEO's Extraordinary Tenure Tells You About His Bank

Source: Capital One annual report.

The average CEO tenure for all companies is a little over eight years, and for the 12 biggest U.S. banks, the figure stands at slightly less than seven years. Yet one CEO, Richard Fairbank -- the founder, chairman, and CEO of Capital One (COF -2.18%) -- has maintained his post for nearly two decades, and his bank's performance during his tenure has returned four times as much to shareholders as the S&P 500 has.

Fairbank has been with Capital One since he founded it 25 years ago as a division of Signet Bank. And he's served as CEO for the past 19 years, ever since it went public as its own entity. By comparison, the three best-known CEOs of the banking industry -- Jamie Dimon of JPMorgan Chase (JPM -0.18%), Brian Moynihan of Bank of America (BAC -1.68%), and Lloyd Blankfein of Goldman Sachs (GS -1.42%) -- have a combined tenure that's less than Fairbank's.

Source: Company history reports.

Fairbank doesn't outpace them in tenure alone. He also eclipses them in total market returns:

Fairbank's longevity comes down to his continual ability to innovate. When he was a consultant before launching Capital One, he saw the potential to use data and information to develop a credit card offering that fit each customer's needs and creditworthiness.

While the industry was favoring a cookie-cutter approach to credit cards -- a flat 19.8% interest rate and a $20 annual fee -- Fairbank seized the opportunity to disrupt that approach by offering a wide variety of credit cards to consumers based on their individual characteristics. This now-commonplace approach was unique when he launched it in the 1980s.

That spirit of innovation has allowed Fairbank and Capital One to remain atop an industry often known for stuffiness and inflexibility. It also helped Capital One make an early push into cyberspace: The company launched one of the first online-centric banks in 1994, and it became the world's third largest in 2011. It also acquired ING Direct, the largest online bank, in 2011.

Fairbank has certainly done well for himself during his tenure, but will he continue to do well for shareholders and their capital? Let's take a look.

Capital deployment
In his letter to shareholders from Capital One's most recent annual report, Fairbank stated:

We'll deploy capital to fund growth with attractive and resilient returns, and to pay a consistent and meaningful dividend. And we expect that our capital generation will support significant share repurchases. We're committed to returning capital to our shareholders through both meaningful dividend and share repurchases.

It's easy for CEOs to proudly proclaim their capital plans and not deliver, but Fairbank has a history of staying true to his word. He identified three areas where Capital One will deploy its capital, so let's see what the bank has done recently regarding funding growth, meaningful dividends, and share repurchases. He's followed through with two of those priorities this year alone.

Funding growth
Since 2005, Capital One has been on a buying spree:

Source: Capital One investor relations.

It's difficult to gauge exactly how well each acquisition has performed, but it's relatively easy to determine whether any of them has been a failure.

Companies will attribute anything over the tangible value of an investment they've paid for to goodwill on the balance sheet. Generally, if goodwill is written down, it means a company has overpaid for something. And Capital One has had a few writedowns to its goodwill in recent years:

Source: Company earnings reports.

Does this mean Capital One has overpaid for its recent acquisitions? In this case, no: The bank's two major writedowns in 2007 and 2008 resulted from exiting the mortgage business (which was a part of North Fork) and from some auto-lending business in the midst of the recession. Investors should take heart in knowing that while Capital One has been busy writing checks, it hasn't been preoccupied with writing down goodwill.

Meaningful dividends
After 13 years of $0.11 annual dividends, Capital One announced that it would begin paying out a yearly $1.50 dividend beginning in February 2008. However, that lasted only five quarters; after the recession hit, the bank reduced its dividend payment to $0.20 annually in March 2009. Yet after it passed the government's stress tests earlier this year, the bank once again increased its annual dividend, up to $1.20.

Dividends historically haven't been a major part of Capital One's capital allocation plans, but that appears to be changing as its business matures. However, investors need to monitor whether Capital One keeps raising that dividend to match any increases in the value of its common stock.

Share buybacks
Fairbank's comments in the annual report regarding Capital One's dividend and share buybacks proved prescient. In addition to this year's dividend increase, Capital One announced a $1 billion share-buyback plan in July. The bank engaged in its last buyback before the market crashed in 2007 -- choosing to focus on acquiring more business. Today, it's far too early to gauge the success of this current plan. But it does show the company's renewed, firm commitment to returning value to shareholders in a meaningful way.

In all, investors should see that Capital One is committed to its long-term health and growth. The bank has emerged from the credit crisis with the same innovate spirit that's always driven it. And with Fairbank at the helm, it's in a good position to stay on top of its rivals for years to come -- to the benefit of its shareholders.