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Market Wisdom

Capital One Consumer Finance Comes Back or Does It?

Consumer banking and finance stocks have been on something of a roll lately. A prime example of this trend is Capital One Financial (NYSE: COF); a hybrid that combines banking, credit cards and Fin Tech solutions.

Capital One has been experiencing some impressive revenue growth lately. Its revenues grew by $560 million during third quarter 2016 and by $2.1 billion during the year that ended on September 30, 2016. For the record; Capital One reported $23.05 billion in revenues in September 2015, $24.57 billion in June 2016 and revenues of $25.13 billion in September 2016.

The revenue growth shows us that this sector is capable of significant growth. They also indicate that there is a growing demand for Capital One’s products such as online bank accounts and credit cards.

Another lesson we can infer here is the big growth in online banking is going to established players like Capital One, and not to upstarts such as Bank of Internet (NASDAQ: BOFI). That makes Capital One a good growth stock in financial services and fintech, but is it a good investment?


Is Capital One Making Money?

If you like companies with a lot of cash the answer is yes, Capital One reported a net income of $3.88 billion and a free cash flow of $2.276 billion on September 30, 2016.

People walk by a Branch of the Capital One bank located on Fifth Avenue in Manhattan on March 15. (Benjamin Chasteen/The Epcoh Times)
People walk by a Branch of the Capital One bank located on Fifth Avenue in Manhattan on March 15. (Benjamin Chasteen/The Epcoh Times)

Capital One also managed to generate $21.82 billion in cash from financing and $12.35 billion in cash from operations during third quarter 2016. That makes it a very cash rich company which can equal a lot of float.

Interestingly enough the net income has been going down over the past year, which points to increased costs of operations. Capital One reported a net income of $4.129 billion in September 2015, $3.989 billion in June 2016 and $3.88 billion on September 30.

The company is also carrying a lot of float in the form of $9.094 billion in cash and short-term investments. That was in addition to $345.06 billion in assets at the end of third quarter 2016.

Capital One is making a lot of money which certainly demonstrates fintech’s possibilities. It also establishes Fintech and banking as value investments.

Why are Capital One’s Revenues Growing?

Revenues are growing at Capital One are increasing because the demand for Fintech is increasing. A major driver of that demand is the growing disenchantment with the big monster banks and brick and mortar banking in general.

Another is the growing use of Fintech solutions such as Bitcoin, Venmo, Apple Pay, Android Pay and Walmart Pay. All of which familiarize users with online payment, app based payment and Fintech. Such solutions often serve as a gateway to the financial services industry for younger consumers, particularly Generation Xers who shun brick and mortar banks like the plague.


There is also a growing demand for traditional financial services such as loans, savings and checking accounts, credit cards and mortgages. This demand is not being met by some of the traditional financial institutions which created an opening for Capital One.

Competitors like Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC) are adding to that demand with scandals like the false accounts and mortgage debacles. That gives them a sleazy reputation and drives consumers to nontraditional solutions; including credit unions and online banks like Capital One.

Is Capital One a Good Investment?

Capital One is not only a growing company in a growing industry it is also a pretty good income investment.

Shareholders received a dividend of 40¢ on August 4, 2016, up from 30¢ in 2015. They also received a dividend yield of 2.09% on November 9, 2016, and a return on equity of 8.12% on September 30, 2016.

This makes COF a good income stock in a growing sector that has a bright future. If you want to add just one financial services tock to your portfolio COF would be a good choice.