Some investors love them, others hate them, but regardless of which camp you find yourself in, the reality is that share buybacks have an ability to boost shareholder value significantly. The news out of Capital One Financial (COF) last week hardly got any attention, but I wanted to point it out in the face of all the negativity surrounding the banking sector.
Despite the gloom and doom forecasts that the U.S. consumer is dead and everybody is facing home foreclosure and default on their credit card and student loan debt (exaggeration intended), Capital One announced a $2 billion share buyback and a dividend increase of 1,289% (to $1.50 per share annually). One has to think the COF board thought long and hard before increasing the company’s annual dividend from 0.2% to 3%. If there was any reasonable chance of a capital shortfall in the future, they would have surely treaded more slowly. The only thing worse than cutting your dividend is doing so only months after initiating one (the prior $0.11 annual dividend was immaterial).
At the beginning of 2007, a $2 billion buyback would have only retired 6% of COF’s shares, but today it represents 11% of the company (nothing to sneeze at). How much of an impact can a buyback like this really have in such a negative environment for financial stocks? Isn’t news of a buyback irrelevant when we are facing the increasing loan losses in 2008?
You might be quick to answer “yes” but looking back at 2007, it appears that the 38% drop in Capital One’s stock was severely overdone. How can that be? Believe it or not, Capital One’s book value per share rose by 1% during 2007. An even more important metric, net tangible assets per share (book value excluding goodwill), rose by 9% during 2007. This was due to a combination of large stock buybacks and lower than anticipated deterioration in Capital One’s asset base.
As the data I have compiled here on COF shows, there is plenty of value in the financial services sector, despite almost constant fear that the financial services industry in our country is falling apart.
Below are Capital One’s shareholder metrics for the twelve months ended 12/31/07. Similar numbers in 2008 would not surprise me, although most of Wall Street seems to think otherwise.
Full Disclosure: Long shares of Capital One at the time of writing