It is perplexing how COF's stock price has maintained a relatively decent level of support with all of the data and projections available; yet that is exactly why we are zeroing in on this particular company.
The chart above shows the massive increase in revolving credit over the past 18 months. This will only be good for the issuers of credit cards as long as payments stay current. If we see a further increase in late payments and defaults, all bets are off as this stock could nosedive towards the $20 price not seen since 1998. The last time we saw a share price significant slide was during 2002 when the economy was slowing at a rapid pace. The fact is that right now, there are too many headwinds to own this name.
Beyond that, there is one recent piece of news out that needs to be addressed and flushed-out. Odd as it seems, on February 1, 2008, COF's press release explained of the company's plan to raise the quarterly dividend from $0.027 to $0.375, payable Feb. 20, 2008 to stockholders of record on Feb. 11. In addition, they put a $2BILLION stock buyback plan into motion. Why? The only thing that can be made of this is an attempt to make it look as though the company is past their problems the management is convinced they will be profitable over the long term. The ugly little truth is that this kind of maneuver allows the company to actually pay less for the dividend, in total, and increases EPS by taking shares off the market. It appears to be nothing more than a move to buy some more time hoping to see if this whole credit crisis will blow over. I am not buying that hype, or the stock!
It is abundantly clear that we are seeing a rise in delinquency rates across all credit genres. The only reason that there has been a lag for the bank card component is that consumers have realized that this is the only remaining source of funds as the equity in their homes have dried up and new home equity loans will be difficult or impossible to find. What used to be the order of payments: Mortgage-Auto-Credit Cards has now changed to Credit Cards-Auto-Mortgage. At first this may seem to be a ray of sunshine in an otherwise cloudy forecast. yet, once again, this is actually a more concerning trend as it shows that borrowers are keen to the current need to keep credit available until they exhaust their limits. None of this is very encouraging.
Throughout the country, credit counseling professionals concur. (USA Today 2/28/08)
Credit bureau analyses of consumer payment data show that financially squeezed borrowers have begun paying their credit card and car bills before their mortgages. That's a striking reversal from the norm, one that reflects rising desperation. It suggests that some people essentially have given up trying to stay current with their mortgages and instead are focused on using credit cards to squeak by.
If the trend persists, many economists say, it could accelerate mortgage losses and further drag down the economy.
Adding further concern is the fact that COF insiders are dumping shares. Whether planned or not, insiders reduced their positions by 10% during the past few months. Keep in mind that this company announced, back in February, a massive buyback program planning to redeem 10% of the total market cap. This points to the obvious strategy of the company's management to help keep shares artificially high as they are selling. Institutions have also had the same idea and have sold off over 23 million shares during the past 6 months, effectively reducing their positions by 7%.
Needless to say, COF=SHORT for our portfolios. We have been recently begun building a position for clients. There just doesn't seem to be any good reason to put money into an institution that relies on uncollaterlized consumer debt as its product/inventory. Adding the economic climate, consumer sentiment and the pending legislation does not seem to provide a recipe for success. Sure, anything is possible - but why go long into a position that appears to have so many potential traps?