Capital One Financial Corporation COF shares touched a new all-time high of $210.67 during Thursday’s trading session after shareholders of both COF and Discover Financial Services Inc. DFS approved the latter’s acquisition.

Capital One agreed to acquire DFS in February 2024 in an all-stock transaction valued at $35.3 billion. This move was aimed to reshape the landscape of the credit card industry by creating a behemoth in the industry and unlock substantial value for shareholders.

Under the terms of the agreement, Discover Financial shareholders will receive 1.0192 Capital One shares for each Discover Financial share.

This acquisition is expected to generate and deliver attractive accretion and returns for shareholders. Expense synergies of $1.5 billion in 2027, coupled with network synergies of $1.2 billion, underscore the merger's value-creation potential. The transaction will result in a more than 15% accretion in adjusted non-GAAP EPS by 2027.

Other Catalysts Supporting Capital One

Relatively Higher Rates: Though the Federal Reserve lowered interest rates by 100 basis points last year, they are expected to remain higher for longer in light of sticky inflation and tariff plans being proposed by the Trump administration. This will support COF’s net interest income (“NII”) and net interest margin (“NIM”).
 
Capital One’s NII indicated a compound annual growth rate (CAGR) of 6% over the five years ended 2024. Further, NIM expanded to 6.88% in 2024 from 6.63% in 2023.
 
Though the company’s revenues declined marginally in 2020, the metric witnessed a five-year (2019-2024) CAGR of 6.5%. In the same time frame, net loans held for investment recorded a CAGR of 4.3%.

Quarterly Revenue Trend

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Further, rising demand for credit card loans and online banking businesses will aid both NII and NIM. Also, the Trump administration's favorable stance toward businesses and expansionary policies is likely to boost loan demand, aiding revenue growth.

Sales Estimates

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Additionally, COF’s Credit Card segment is likely to grow continuously. Strong growth opportunities in card loans and purchase volumes will likely continue despite an intensely competitive environment. This is demonstrated by an improvement in the Domestic Credit Card division, which accounted for 94.8% of Credit Card net revenues in 2024.

Solid Balance Sheet: As of Dec. 31, 2024, Capital One had a total debt (securitized debt obligations plus other debt) of $45.6 billion. The total cash and cash equivalents balance was $43.2 billion.

Additionally, the company maintains investment-grade long-term senior debt ratings of Baa1, BBB, and A- from Moody’s Investor Service, the Standard and Poor’s and, Fitch Ratings, respectively. This renders the company favorable access to the debt market. Thus, given its decent earnings strength and a solid liquidity position, COF will likely be able to address debt obligations in the near term, even if the economic situation worsens.

Moreover, as of Dec. 31, 2024, Capital One’s common equity tier 1 ratio and the total capital ratio of 13.5% and 16.4%, respectively, were well above the regulatory requirements. Further, the company has an average liquidity coverage ratio of 155%.

Average Liquidity Coverage Ratio Trend

Image Source: $Capital One Financial Corp(COF-N)$.

Capital One’s focus on maintaining strong capital and balance sheet positions supports its capital distribution activities.

In July 2021, the company hiked its dividend by 50% to 60 cents per share and has maintained the same level since then. The bank hiked dividends twice during the last five years with a dividend payout ratio of 17%.

Dividend Yield

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Similarly, its close peer Ally Financial ALLY increased its dividend twice over the past five years, while Credit Acceptance Corporation CACC has never paid any dividends.

Also, COF has a share repurchase plan.  As of Dec. 31, 2024, roughly $4.05 billion worth of shares remained available for repurchase under the authorization.

Headwinds Faced by Capital One

Weak Asset Quality: Capital One’s deteriorating asset quality is a major concern. Provision for credit losses and net charge-offs (NCOs) have risen amid an uncertain operating backdrop.

Though the company recorded a provision benefit in 2021, provision for credit losses witnessed a CAGR of 13.4% over the last five years (2019-2024). Likewise, NCOs recorded a CAGR of 11.4% in the same time frame.

The company’s credit quality is expected to remain under pressure due to a tough macroeconomic outlook and persistent inflation.

Rising Operating Expenses: Capital One has been witnessing a continuous rise in expenses. Though expenses declined in 2020, the metric recorded a CAGR of 6.8% over the last five years (ended 2024). The increase has mainly been because of a rise in marketing costs (recorded a CAGR of 14.9% in the same time frame) and inflationary pressure.

Expense Growth Trend

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Expense levels are expected to remain elevated in light of ongoing investments in technology and infrastructure alongside inorganic expansion efforts. Higher cost of modern tech talent and continued investments in growth opportunities will strain annual operating efficiency in the near term.

Bullish Analyst Sentiments for COF

Over the past month, the Zacks Consensus Estimate for 2025 and 2026 earnings of $15.65 and $18.17 per share, respectively, has moved marginally upward.

Estimate Revision Trend

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The projected figures imply growth of 12.1% and 16.2% for 2025 and 2026, respectively.

Find the latest earnings estimates and surprises on Zacks Earnings Calendar.

Buy, Hold or Sell Capital One Stock?

Relatively high interest rates, strategic buyouts, decent loan demand and a solid balance sheet are likely to support Capital One’s financials. Moreover, the Trump administration’s expansionary moves will further complement the company’s growth initiatives to boost loan demand and drive the top line.

Over the past six months, COF stock has risen 47.2%, outperforming the industry, the Zacks Finance Sector and the S&P 500 index. Also, the company’s shares have fared better than its peers, Credit Acceptance and Ally Financial.

Six-Month Price Performance

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However, rising expenses and worsening asset quality remain concerns. Further, the impact of tariffs on inflation is to be seen. Thus, COF stock remains a cautious bet for investors now. Those who own it can hold it for now.

COF currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Discover Financial Services (DFS) : Free Stock Analysis Report

Capital One Financial Corporation (COF) : Free Stock Analysis Report

Credit Acceptance Corporation (CACC) : Free Stock Analysis Report

Ally Financial Inc. (ALLY) : Free Stock Analysis Report

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