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1 Warren Buffett Dividend Stock Up 25% That Still Looks Like a Bargain

Law1 Warren Buffett Dividend Stock Up 25% That Still Looks Like a Bargain

Investors looking for a no-brainer dividend stock to buy and hold for the long run should look at Warren Buffett and the banking industry. During the first two quarters of 2023, Buffett’s holding company Berkshire Hathaway bought about 12.5 million shares of Capital One Financial (COF 1.41%).

Buffett will be the first to warn everyday investors that not every stock pick Berkshire makes works out as intended. That said, following Buffett’s lead by acquiring Capital One stock could be a smart move. Despite rising about 25% over the past 12 months, the stock still looks like a bargain for investors willing to hold it over the long run.

Capital One’s leading credit card business could get a lot more lucrative

Capital One turned a lot of heads recently with a $35 billion all-stock offer for Discovery Financial Services (DFS 1.78%). It’s unclear if Berkshire Hathaway knew in advance that Capital One would try to acquire the smallest of the four main payment networks. That said, folks who keep an eye on the banking sector knew that Discover had been struggling and could be receptive to a buyout offer.

At the end of 2023, Capital One Financial was America’s third-largest issuer of Visa and MasterCard credit cards, based on outstanding balances. Every time a consumer pulls out their Capital One card to pay for something, Visa or MasterCard receives an interchange fee from retailers that Capital One would rather hang on to. By acquiring an established payment network, it can keep those fees or adjust them to compete.

By transitioning a lot of cards from Visa’s and Mastercard’s networks to its own, Capital One thinks it can generate $2.7 billion in pre-tax synergies by 2027. That’s a lot of extra income for a bank that earned $4.6 billion in 2023.

What about Washington?

Capital One expects its proposed merger with Discover to close in late 2024 or early 2025, but that’s a long way from guaranteed. You may remember that in 2021, President Joe Biden signed an executive order that directed federal regulators to strengthen oversight of bank mergers.

The company’s proposed acquisition of Discovery Financial for $35 billion would be the largest merger between credit card businesses since before the Great Recession. And given the potential merger’s high profile, it’s no wonder that Senators on both sides of the aisle are already calling on federal regulators to block the deal.

Congressional pushback for a $35 billion banking merger is to be expected, but at the end of the day, regulators have to apply laws as they exist. Industry experts generally agree that putting Capital One’s muscle behind the smallest of the four payment networks is a great way to boost competition against American Express, Mastercard, and Visa.

I won’t be surprised if the Department of Justice attempts to block the proposed merger. That being said, I’ll be shocked if any courts uphold an attempt to block the deal on grounds that it’s anti-competitive.

Warren Buffett at a conference.

Image source: The Motley Fool.

A buy, regardless

Capital One expects to generate $2.7 billion in pre-tax synergies from an acquisition of Discovery in 2027. Even if we delay this expectation until 2029, the company’s shares look like a bargain. The bank stock has risen sharply but at recent prices, it’s still trading for just 9.9 times forward earnings expectations, or 1.21 times its tangible book value.

Capital One’s quarterly dividend payout hasn’t risen steadily but has doubled over the past decade. At recent prices, it offers a 1.8% yield that could climb much higher if the deal goes through and the bank can benefit from a payment network of its own.

American Express is an advertising partner of The Ascent, a Motley Fool company. Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends Discover Financial Services and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.

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