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Capital One: Is it the Future of Financial Services?

A good place to see the future of banking on display is at Capital One Financial (NYSE: COF). Capital One is many things to many people, including a bank, a credit card servicer, a payment processor, an internet bank, a credit card company, and even a brokerage.

Such one-stop shopping for financial services is probably the future of banking. A number of companies are attempting to provide such an integrated solution these days, including PayPal Holdings (NASDAQ: PYPL), Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and even Apple (NASDAQ: AAPL). Capital One is a great benchmark to use for such companies because it has been doing all this stuff for some time.

Is Capital One Better than American Express?


Smart investors will ask if this approach is paying off for Capital One or not. The answer, if you go by revenues, appears to be yes: Capital One’s revenue grew by $1.2 billion in 2015, rising from $22.29 billion to $23.41 billion between December 2014 and December 2015.

That’s an impressive amount of growth given the recent losses over at American Express (NYSE: AXP). Amex’s revenue fell by $1.37 billion in 2015, dropping from $34.19 billion in the fourth quarter of 2014 to $32.82 billion a year later. That casts serious doubt upon Amex’s business model and justifies Capital One’s more diversified approach.

Is Capital One Making Money?

Okay, so Capital One’s revenue is growing, but is it making money? More importantly, is it making more money with that additional revenue?

The answer is maybe not because Capital One’s net income is actually done. It started 2015 with a net income of $4.428 billion in December 2014 that fell to $4.05 billion a year later. That equals a loss of $378 million over the course of the year, which calls the revenue growth into question.

Some of the other figures at Capital One were pretty good though. It reported a profit margin of 14.85% and a free cash flow of $1.001 billion on Dec. 31, 2015, yet it was doing very well in the cash department.

Capital One reported making $20.38 billion in cash from financing and $10.13 billion in cash from operations in the fourth quarter. Cash from financing was way up, growing from $7.638 billion in December 2014 to $20.38 billion a year later. Cash from operations also grew, rising from $9.304 billion in December 2014 to $10.13 billion a year later.

To add icing to the cake, Capital One also had a lot of float; it had $7.984 billion in December 2015, up slightly from $7.242 billion in the fourth quarter of 2014. This means that Capital One is a value investment because it has a lot of cash.


Is Capital One a Good Investment?

Capital One is a really good investment that is paying off for its shareholders. Those shareholders received a dividend yield of 2.29%, a dividend of 40¢ a share, and a return on equity of 8.71%.

More importantly, Capital One is decidedly undervalued; it had an enterprise value of $86.94 billion and a market capitalization of $36.79 billion on March 25. It is a better play than American Express because Capital One is growing.

Best of all, Capital One is a fairly safe online financial and banking investment. Unlike the questionable Bank of Internet (NASDAQ: BOFI), it has steered clear of subprime lending. A feature of Capital One that I like is its focus on basic banking and credit card services.

These services are not sexy, but they do generate a lot of float without taking on undue risks, although there is a subprime risk at Capital One because of its willingness to issue credit cards to almost everybody under the sun.

My take is that Capital One’s cash and revenue will grow for the foreseeable future because it is well placed to take advantage of the trends in modern banking. In particular, it is in a good position to offer such next-generation solutions as payment apps and online loans.

If you’re looking for a really good bank with growth potential to add to your portfolio, Capital One would be a good pick. The risks are low because of all the float, but the opportunities for growth in consumer banking are there, particularly with the popular dissatisfaction with large traditional banks such as JP Morgan Chase. Capital One is certainly a value investment in banking.

Disclosure: The blogger and writer owns shares of PayPal and Bank of America (NYSE: BAC).