It’s a story that hasn’t gotten a whole lot of press recently, but U.S. banks are doing well.
Wells Fargo & Co (NYSE:WFC) shares hit an all-time high on July 8. The other three large U.S. banks are also on the rise: Citigroup Inc (NYSE:C) is up 25%, Bank of America Corp (NYSE:BAC) is up 14%, and JPMorgan Chase & Co. (NYSE:JPM) is up 24%.
The reason? Put simply, banks make money by borrowing at a low rate and lending at a high rate. The rates being offered for the average savings account are next to nothing these days. Yet banks are able to turn around and issue loans to businesses and individual customers for rates of 4% to 5%. This difference is called the interest rate spread. On top of that, banks are able to loan many times the amount of money they are required to keep in reserve. This use of leverage maximizes profits even further.
Ever since the financial crisis, lending has been on the rise. And when the money flows, banks get rich.
As you can see in this chart showing the total loans and leases of U.S. commercial banks over the past five years, lending levels are now surpassing the same $7.3 trillion mark reached just before the financial crisis.
StreetAuthority expert Michael Vodicka pointed out in a recent article that Warren Buffett has been stocking up on financial stocks: “Buffett was busy loading up on shares of Wells Fargo & Co (NYSE:WFC) between January and March, closing this year’s first quarter with 460 million shares, up 4% from last year and his biggest holding with a 20% allocation.
“But while Buffett has been accumulating shares of Wells Fargo & Co (NYSE:WFC) for years, he initiated a new position in another bank stock during the first quarter. Berkshire Hathaway Inc. (NYSE:BRK.A) disclosed ownership of 50 million shares of U.S. Bancorp (NYSE:USB), Berkshire Hathaway Inc. (NYSE:BRK.A)’s seventh-largest holding with a 2.6% allocation.”
While all the aforementioned companies deserve a closer look, today I’d like to tell you about another financial stock that is selling for what I think is a bargain price and just announced a $1 billion share buyback program.
Although it doesn’t often get the same kind of press as the “big four” banks mentioned above, Capital One Financial Corp. (NYSE:COF) is actually the seventh-largest bank in the U.S. by deposits.
On July 2, Capital One Financial Corp. (NYSE:COF) received Federal Reserve approval to repurchase up to $1 billion of its own shares. The bank plans to start buying the shares later this year and complete the buyback by the end of next year’s first quarter.
Capital One Financial Corp. (NYSE:COF) currently has 561 million shares outstanding, which at today’s prices bring the total value to roughly $36.9 billion. So $1 billion worth of share repurchases won’t have a huge impact on the current value of shares.
But what is more important here is that Capital One Financial Corp. (NYSE:COF) is making an effort to increase shareholder value. It’s also worth noting that companies often repurchase shares of their own stock when management believes those shares are undervalued.
Earlier this year, there was more good news for Capital One Financial Corp. (NYSE:COF) shareholders.
On May 2, Capital One Financial Corp. (NYSE:COF) raised its dividend to 30 cents a share from 5 cents. This marked its first dividend increase since the financial crisis. The current yield stands at 0.7 %, but analysts at Morningstar forecast a projected yield of 1.8% in the near future.