On Mar 18, 2013, the shares of Discover Financial Services (DFS) hit a 52-week high of $44.43 propelled by its initiatives to boost shareholder value along with the impetus provided by the new growth initiatives revealed in the investor conference held recently.
Last week, the board of Discover Financial approved a new share repurchase program worth $2.4 billion. The company’s capital plan for 2013 also includes a proposal to increase the quarterly dividend to 20 cents per share from 14 cents paid currently. These plans are aimed at maximizing shareholder value by returning surplus capital.
DFS also plans to expand its market presence through product launches, extension of distribution channels and partnerships. The company recently announced affiliations with Cadence Bank and Interswitch Limited to boost card acceptances and transaction volume.
Moreover, in the investor conference, Discover Financial announced its plans to enter the checking and home equity businesses in 2013. The company will also launch a new banking platform during the year and expand the PULSE network to include all debit transactions.
Discover Financial has set a long-term growth rate target of 2%–5% for card receivables, 5%–10% for other consumer lending and over 10% for payment volume. Further, the company wants to achieve return on equity of 15% and Tier 1 common ratio of about 9.5% in the long term.
Discover Financial has a history of outperforming estimates. The company witnessed positive surprises in 9 out of the past 10 quarters. The average surprise in the past four quarters was 10.36%.
The long-term expected earnings growth rate for Discover Financial is 8.98%.
On Dec 20, 2012, the company reported fourth-quarter 2012 operating earnings per share of $1.07, lagging the Zacks Consensus Estimate of $1.13. However, earnings surpassed the year-ago quarter’s earnings of 95 cents per share.
The valuation for Discover Financial looks reasonable. Although the shares are currently trading at a premium on both price-to-book and forward price-to-earnings basis, the return on equity of 25.7% is higher than the peer group average of 21.8%. The 1-year return for the stock came in at 38.03%, much above the S&P 500’s return of 10.53%.
Discover Financial currently carries a Zacks Rank #2 (Buy). Other companies worth considering in the financial sector are Encore Capital Group, Inc. (ECPG), Global Payments Inc. (GPN) and Total System Services, Inc. (TSS), which also carry a Zacks Rank #2 (Buy).
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