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gameguru (33.74)

July 2007

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Capital One: Two-Faced or a Single Coin?

July 20, 2007 – Comments (0)

The market doesn't know what to make of Capital One. Is it a high-growth, high-risk, low-yield lender, or a low-growth, low-risk branch bank that should be offering a high yield? The answer is simultaneously both and neither, yet it's hybrid identity has the market pricing it as the worst of all possible financial institutions - expecting low-growth, high-risk, and low-yield. While it is certainly a low-yield stock, that's because Capital One has consistently been able to get higher returns on investment than it would through returning money via a dividend. (I would argue that at current prices, buybacks are a better use of any uninvested cash flow than dividends.) Ever since it got into trouble with regulators a few years ago for underfunding its loss reserves, it has been carefully increasing those reserves and also focusing on increasing credit quality. Coupled with the bank acquistions, the company is now lower-risk than ever, and yet it continues to exhibit nice growth rates.   [more]

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