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Why Capital One Is Likely to Raise Its Dividend for Years to Come

By John Maxfield - Sep 11, 2015 at 7:20PM

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Because Capital One is still a relatively young company, it hasn't scaled up its quarterly distributions to the same extent as its big bank counterparts have.

One of the many reasons to own Capital One's (COF -0.93%) stock is the likelihood that it will increase its dividend in the coming years. The charts below capture this opportunity from three different perspectives.

The first chart shows the history of Capital One's quarterly dividend per share:

Unlike other major banks, Capital One doesn't have a long history of increasing its quarterly distribution. But this isn't because it doesn't care about its shareholders. It's rather because Capital One is still a relatively new company, becoming an independent entity a mere two decades ago. Over the latter half of this period, moreover, it has expanded aggressively, buying multiple regional lenders in an effort to transform itself into a diversified financial services company along the likes of the nation's biggest banks. Its available cash flow, in other words, was better spent elsewhere.

The second chart illustrates Capital One's payout ratio, the percentage of net income it distributed to shareholders in 2014:

Most banks strive to pay out a third of their earnings to shareholders by way of dividends, leaving the remaining two-thirds to be split roughly evenly between retained earnings and share buybacks. Capital One, however, doesn't follow this model -- not right now at least. Its payout ratio last year was only 16%. This goes to show how much opportunity the company has to increase its payout in the future.

Finally, the third chart compares Capital One's dividend yield -- its annual payout divided by its share price -- to its competitors:

Once again, this chart show Capital One's opportunity to increase its dividend. Whereas the dividend yields on most of its competitors' stocks exceed 2%, Capital One's is only 1.9%, according to data from YCharts.com. The incentive to raise this comes from the desire to attract income-seeking investors, who generally follow the buy-and-hold approach, which, in turn, translates into a less volatile stock, something that all companies strive for.

In sum, if you're on the hunt for a great bank stock that seems likely to raise its dividend consistently over the coming years, you could do a lot worse than Capital One.

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Stocks Mentioned

Capital One Financial Corporation Stock Quote
Capital One Financial Corporation
COF
$113.33 (-0.93%) $-1.06

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