Capital One Financial Corp. (COF), Discover Financial Services (DFS), American Express Company (AXP): Why Value Investors Should Flock to Credit Card Stocks

Bank on better capital allocation

Discover and Capital One plan to shift their capital allocation priorities. In 2012, Discover engaged in an aggressive share repurchase plan that sent diluted shares outstanding falling from 533 million shares to 506 million shares in just one year. Discover also increased its quarterly dividend to $.14 per share, giving it a yield of 1.45% with plenty of room for dividend growth. Goldman Sachs analysts believe the company will continue this policy in 2013, paying out more than 100% of its earnings in buybacks and dividends. That’s good news for long-term investors.

Capital One is also in position to return capital to shareholders after digesting major acquisitions. In the latest conference call, CEO Richard D. Fairbank fielded analyst questions about a higher dividend and robust share repurchases. Fairbank implied that the company would ask the Federal Reserve for permission first to pay a “meaningful dividend” to shareholders before increasing repurchases once a higher dividend is in place. The chief executive told investors to plan for a simple ask at the next comprehensive capital analysis and review with the Federal Reserve for 2013, which will set the pace for a larger dividend in 2014.

Better capital allocation is a boon for shareholders. Single-digit forward earnings multiples and stock prices less than book value are generally reserved for dying businesses rather than growing and safe consumer finance companies. Look for improved capital allocation to drive these value stocks as dividends and repurchases act as built-in catalysts to drive shareholder value. You can’t go wrong buying leading brands at double-digit earnings yields.

The article Why Value Investors Should Flock to Credit Card Stocks originally appeared on Fool.com and is written by Jordan Wathen.

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