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Acquisitions & Card Business Aid Capital One (COF) Amid Low Rates

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Capital One Financial’s (COF - Free Report)   inorganic expansion strategy and gradual rise in demand for consumer loans are anticipated to continue supporting financials in the quarters ahead amid lower rates. Moreover, a solid liquidity position, along with the impressive capital-deployment activities, bodes well for the company.

Capital One’s revenues have witnessed a compound annual growth rate (CAGR) of 2.8% over the last five years (2016-2020), largely driven by opportunistic acquisitions and improving loan balance. Credit card and online banking businesses remain other major contributors to the company’s top-line growth. The Walmart partnership and the 2017 acquisition of Cabela's Incorporated’s credit card operations bode well. Given the anticipation of stellar growth opportunities in card loans and purchase volumes, the company’s top line is likely to improve further.

Capital One’s balance-sheet position is solid. As of Dec 31, 2020, the company had both total debt, and cash and cash equivalents balance of$40.5 billion. Besides, its times interest earned of 4.4 at the end of fourth-quarter 2020 improved sequentially. Thus, given its strong liquidity profile, the company will be able to continue meeting debt obligations, even if the economic situation worsens.

Apart from this, the company’s capital-deployment initiatives look encouraging. Capital One has restored its quarterly dividend to 40 cents per share, after slashing the same 75% last year. Further, this January, it announced a new share-repurchase program (which was suspended in 2020) of up to $7.5 billion worth of shares for 2021. Similarly, several other finance companies like Ally Financial (ALLY - Free Report) , Middlefield Banc Corp. (MBCN - Free Report) and CBTX, Inc. (CBTX - Free Report) have announced the resumption of buyback plans after temporary suspensions amid the coronavirus mayhem.

However, near-zero interest rates are likely to continue putting pressure on Capital One’s net interest margin in the near term. Also, elevated operating expenses and deteriorating credit quality remain concerns for the company.

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