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COF Stock Tanks 5.9% Post Discover Merger: A Good Buying Opportunity?
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Shares of Capital One Financial Corporation (COF - Free Report) have lost 5.9% since the completion of the acquisition of Discover Financial Services on May 18. The $35-billion deal reshapes the landscape of the credit card industry, creating a behemoth (in terms of loan volume).
Under the terms of the agreement, Discover Financial shareholders received 1.0192 Capital One shares for each Discover Financial share. Now, the company is well-positioned to capture a bigger share of spending on cards and compete with well-known card issuers. Also, it now has control of Discover’s payments network—one of only four in the United States. This will enable it to generate greater revenues from interchange fees and offer independence from the Visa-Mastercard duopoly.
At the time of the announcement (February 2024), it was noted that the Capital One-Discover merger will likely 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 value-creation potential of the merger. The transaction will result in a more than 15% accretion to adjusted non-GAAP EPS by 2027.
Over the years, COF has pursued a strategic acquisition strategy to diversify its offerings and expand its market presence. Some of the notable ones are ING Direct USA, HSBC's U.S. Credit Card Portfolio and TripleTree. These acquisitions have been instrumental in transforming the company from a monoline credit card issuer into a diversified financial services firm with a significant presence in retail banking, commercial lending and digital banking platforms.
So, is this a good time to capitalize on the dip and add Capital One stock to your portfolio? Let’s find out.
Other Factors That Support Capital One
Relatively Higher Rates: The Federal Reserve has kept interest rates unchanged because of tariff policy concerns. This will likely support COF’s net interest income (“NII”) and net interest margin (“NIM”).
Capital One’s NII recorded a compound annual growth rate (CAGR) of 6% over the five years ended 2024. Also, NIM expanded to 6.88% in 2024 from 6.63% in 2023. The momentum continued for NII and NIM in the first quarter of 2025.
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%. The uptrend continued for revenues and loans during the first three months of 2025.
Quarterly Revenue Trend
Image Source: Zacks Investment Research
Rising demand for credit card loans and online banking businesses will aid both NII and NIM. Additionally, Capital One plans to continue to offer Discover credit card products as Discover-branded cards as well as the other consumer cards currently offered by Capital One. This will solidify its presence in an intensely competitive environment. COF has been demonstrating an improvement in the Domestic Credit Card division, which accounted for 95.6% of Credit Card net revenues in the first quarter of 2025.
Further, Capital One's "Digital First" banking model, characterized by its iconic customer experience and fee-free offerings, will be bolstered by Discover Financial's national direct savings bank. This synergy will increase the combined company's ability to compete with the nation's largest banks while accelerating national banking growth.
Sales Estimates
Image Source: Zacks Investment Research
Solid Balance Sheet: As of March 31, 2025, Capital One had a total debt (securitized debt obligations plus other debt) of $41.8 billion. The total cash and cash equivalents balance was $48.6 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 March 31, 2025, Capital One’s common equity tier 1 ratio and the total capital ratio of 13.6% and 17%, respectively, were well above the regulatory requirements. Further, the company has an average liquidity coverage ratio of 152%.
Average Liquidity Coverage Ratio
Image Source: Capital One Financial Corp.
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 thrice during the last five years, with a dividend payout ratio of 16%.
Dividend Yield
Image Source: Zacks Investment Research
Similarly, its close peer Ally Financial (ALLY - Free Report) and OneMain Holdings, Inc. (OMF - Free Report) increased their dividends twice and seven times over the past five years, respectively.
Capital One has a share repurchase plan. As of March 31, 2025, roughly $3.88 billion worth of shares remained available for repurchase under the authorization.
Mixed Analyst Sentiments for Capital One
Over the past week, the Zacks Consensus Estimate for 2025 earnings of $14.77 has moved down 3.1%, while the same for 2026 earnings has moved 1.4% upward to $18.49 per share.
Estimate Revision Trend
Image Source: Zacks Investment Research
The projected figures imply a rise of 5.8% and 25.2% for 2025 and 2026, respectively. (Find the latest EPS estimates and surprises on Zacks Earnings Calendar.)
How to Play Capital One Stock Now
COF stock has risen 35.5%, outperforming its close peers — Ally Financial and OneMain — over the past year. Further, it has outperformed the industry, Zacks Finance Sector and the S&P 500 index over the same time frame.
Capital One’s One-Year Price Performance
Image Source: Zacks Investment Research
Capital One is well-positioned to capitalize on the Discover Financial acquisition and expand its presence in the growing credit card market. Its revenue diversification efforts, relatively higher interest rates, and a solid balance sheet will continue to support its financials. Moreover, analysts remain optimistic regarding COF’s long-term prospects despite near-term concerns.
However, steadily rising expenses are a headwind. The company recorded a five-year CAGR of 6.8% (ended 2024) in non-interest expenses, mainly due to higher marketing costs and inflationary pressures. The uptrend persisted during the first quarter of 2025. Expenses are expected to remain elevated in the near term due to ongoing technological investments, integration of Discover Financial and high inflation.
Deteriorating asset quality is another concern. Capital One’s provisions and net charge-offs (NCOs) recorded a CAGR of 13.4% and 11.4% over the five years ended 2024. Though the trend reversed for provisions during the first three months of 2025, NCOs continued to rise. Amid a challenging macroeconomic backdrop and the Discover Financial merger, provision and NCOs are likely to remain elevated.
In terms of valuation, COF’s price-to-book ratio (P/B) of 1.11X is higher than the industry's 0.71X. Thus, the stock is trading at a premium. This suggests that investors may be paying a higher price relative to the company's expected earnings growth.
P/B Ratio
Image Source: Zacks Investment Research
Meanwhile, its peers Ally Financial and OneMain have a P/B ratio of 0.87X and 1.82X, respectively. This indicates Ally Financial is trading at a discount while OneMain is overvalued relative to Capital One.
Further, Capital One might be allocating capital inefficiently. This is demonstrated by the company’s return on equity (ROE) of 9.63% compared with the industry’s ROE of 9.78%.
ROE
Image Source: Zacks Investment Research
Thus, investors should watch out for these concerns and also monitor how Capital One integrates the Discover acquisition into its businesses before making any investment decision. Those who already own the stock can hold on to it for robust long-term gains.
Image: Bigstock
COF Stock Tanks 5.9% Post Discover Merger: A Good Buying Opportunity?
Shares of Capital One Financial Corporation (COF - Free Report) have lost 5.9% since the completion of the acquisition of Discover Financial Services on May 18. The $35-billion deal reshapes the landscape of the credit card industry, creating a behemoth (in terms of loan volume).
Under the terms of the agreement, Discover Financial shareholders received 1.0192 Capital One shares for each Discover Financial share. Now, the company is well-positioned to capture a bigger share of spending on cards and compete with well-known card issuers. Also, it now has control of Discover’s payments network—one of only four in the United States. This will enable it to generate greater revenues from interchange fees and offer independence from the Visa-Mastercard duopoly.
At the time of the announcement (February 2024), it was noted that the Capital One-Discover merger will likely 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 value-creation potential of the merger. The transaction will result in a more than 15% accretion to adjusted non-GAAP EPS by 2027.
Over the years, COF has pursued a strategic acquisition strategy to diversify its offerings and expand its market presence. Some of the notable ones are ING Direct USA, HSBC's U.S. Credit Card Portfolio and TripleTree. These acquisitions have been instrumental in transforming the company from a monoline credit card issuer into a diversified financial services firm with a significant presence in retail banking, commercial lending and digital banking platforms.
So, is this a good time to capitalize on the dip and add Capital One stock to your portfolio? Let’s find out.
Other Factors That Support Capital One
Relatively Higher Rates: The Federal Reserve has kept interest rates unchanged because of tariff policy concerns. This will likely support COF’s net interest income (“NII”) and net interest margin (“NIM”).
Capital One’s NII recorded a compound annual growth rate (CAGR) of 6% over the five years ended 2024. Also, NIM expanded to 6.88% in 2024 from 6.63% in 2023. The momentum continued for NII and NIM in the first quarter of 2025.
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%. The uptrend continued for revenues and loans during the first three months of 2025.
Quarterly Revenue Trend
Image Source: Zacks Investment Research
Rising demand for credit card loans and online banking businesses will aid both NII and NIM. Additionally, Capital One plans to continue to offer Discover credit card products as Discover-branded cards as well as the other consumer cards currently offered by Capital One. This will solidify its presence in an intensely competitive environment. COF has been demonstrating an improvement in the Domestic Credit Card division, which accounted for 95.6% of Credit Card net revenues in the first quarter of 2025.
Further, Capital One's "Digital First" banking model, characterized by its iconic customer experience and fee-free offerings, will be bolstered by Discover Financial's national direct savings bank. This synergy will increase the combined company's ability to compete with the nation's largest banks while accelerating national banking growth.
Sales Estimates
Image Source: Zacks Investment Research
Solid Balance Sheet: As of March 31, 2025, Capital One had a total debt (securitized debt obligations plus other debt) of $41.8 billion. The total cash and cash equivalents balance was $48.6 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 March 31, 2025, Capital One’s common equity tier 1 ratio and the total capital ratio of 13.6% and 17%, respectively, were well above the regulatory requirements. Further, the company has an average liquidity coverage ratio of 152%.
Average Liquidity Coverage Ratio
Image Source: Capital One Financial Corp.
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 thrice during the last five years, with a dividend payout ratio of 16%.
Dividend Yield
Image Source: Zacks Investment Research
Similarly, its close peer Ally Financial (ALLY - Free Report) and OneMain Holdings, Inc. (OMF - Free Report) increased their dividends twice and seven times over the past five years, respectively.
Capital One has a share repurchase plan. As of March 31, 2025, roughly $3.88 billion worth of shares remained available for repurchase under the authorization.
Mixed Analyst Sentiments for Capital One
Over the past week, the Zacks Consensus Estimate for 2025 earnings of $14.77 has moved down 3.1%, while the same for 2026 earnings has moved 1.4% upward to $18.49 per share.
Estimate Revision Trend
Image Source: Zacks Investment Research
The projected figures imply a rise of 5.8% and 25.2% for 2025 and 2026, respectively. (Find the latest EPS estimates and surprises on Zacks Earnings Calendar.)
How to Play Capital One Stock Now
COF stock has risen 35.5%, outperforming its close peers — Ally Financial and OneMain — over the past year. Further, it has outperformed the industry, Zacks Finance Sector and the S&P 500 index over the same time frame.
Capital One’s One-Year Price Performance
Image Source: Zacks Investment Research
Capital One is well-positioned to capitalize on the Discover Financial acquisition and expand its presence in the growing credit card market. Its revenue diversification efforts, relatively higher interest rates, and a solid balance sheet will continue to support its financials. Moreover, analysts remain optimistic regarding COF’s long-term prospects despite near-term concerns.
However, steadily rising expenses are a headwind. The company recorded a five-year CAGR of 6.8% (ended 2024) in non-interest expenses, mainly due to higher marketing costs and inflationary pressures. The uptrend persisted during the first quarter of 2025. Expenses are expected to remain elevated in the near term due to ongoing technological investments, integration of Discover Financial and high inflation.
Deteriorating asset quality is another concern. Capital One’s provisions and net charge-offs (NCOs) recorded a CAGR of 13.4% and 11.4% over the five years ended 2024. Though the trend reversed for provisions during the first three months of 2025, NCOs continued to rise. Amid a challenging macroeconomic backdrop and the Discover Financial merger, provision and NCOs are likely to remain elevated.
In terms of valuation, COF’s price-to-book ratio (P/B) of 1.11X is higher than the industry's 0.71X. Thus, the stock is trading at a premium. This suggests that investors may be paying a higher price relative to the company's expected earnings growth.
P/B Ratio
Image Source: Zacks Investment Research
Meanwhile, its peers Ally Financial and OneMain have a P/B ratio of 0.87X and 1.82X, respectively. This indicates Ally Financial is trading at a discount while OneMain is overvalued relative to Capital One.
Further, Capital One might be allocating capital inefficiently. This is demonstrated by the company’s return on equity (ROE) of 9.63% compared with the industry’s ROE of 9.78%.
ROE
Image Source: Zacks Investment Research
Thus, investors should watch out for these concerns and also monitor how Capital One integrates the Discover acquisition into its businesses before making any investment decision. Those who already own the stock can hold on to it for robust long-term gains.
Currently, COF carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.