Discover Financial Services (DFS) has been a top performing financial since the lows of 2009. There are several positive catalysts for the company going forward, which we will take a look at. It is set to report earnings this week and a beat could be in store.
Discover is going to be reporting earnings on April 23. Analysts currently project it to report the following numbers:
|Expected Earnings Per Share||$1.12|
|Expected Revenue||$1.98 billion|
I believe Discover will exceed these expectations based on better-than-expected cardholder spending increases. Analysts should not underestimate this company as they are a growing force in the credit card industry. American Express gave us a good look into consumer spending habits that support this argument, which we will discuss later.
Dividend raise and buyback
Discover recently raised its dividend 43% to $0.80 annually. At current levels, this makes the stock yield 1.85%, which is much higher than MasterCard's (MA) 0.50%, Visa's (V) 0.80%, and American Express' (AXP) 1.2% yield. Discover has increased this dividend since 2010 and should continue the streak for the next several years as earnings rise.
On the same day of the dividend raise, Discover also announced a $2.4 billion share repurchase program. This repurchase replaced the company's old plan to buy back $2 billion in shares, which had $600 million remaining. The new program does not expire until March of 2015, so I would not be surprised if it were revised once again.
Management stated, "The share repurchase program and planned dividend increase reflect the strength of our capital position and our commitment to effective capital management." I believe in this management team and know they have a commitment to increasing shareholder value.
(The press release of this information can be found here.)
American Express' results
American Express reported first quarter earnings last week and the stock has spiked nearly 5% since. Here is a quick glance at the report:
- Earnings per share increased 7% to $1.15
- Revenue rose 4% to $7.9 billion
- Net income increased 2% to $1.3 billion
- Cardholder spending rose 6% for the quarter
The reported earnings per share exceeded analyst expectations, but revenue fell short. This has been the case for numerous companies that have reported in 2013, so it is good to see the stock run higher. The most notable part of American Express' report is that it showed cardholder spending rose 6% for the quarter. As long as consumer spending continues to rise, the credit card companies will flourish. This is because the increased spending correlates with the increased use of credit cards since they are the preferred method of payment. Had there been a decrease, I would have been worried about Discover, but now I am fully confident.
Positives: PayPal and Google Wallet
Last year, Discover made a great move by teaming up with eBay's (EBAY) PayPal and Google's (GOOG) Google Wallet to offer consumers other payment methods in stores. PayPal is the global leader in online payments, with over 120 million active users. It has set up deals with several national chains, including Home Depot (HD), Abercrombie & Fitch (ANF) and Dollar General (DG) for in-store purchases. By adding Discover as a partner, PayPal now has access to over 7 million other merchants in Discover's network. The positive for Discover is that its payment processing unit has another way of increasing volume. The full press release on this partnership can be found here.
The deal with Google Wallet is more of a direct play on the increase of Discover Card use. Google Wallet allows users to access their credit cards through an app on their phone. Users save their credit card information and can then access them and pay in-store by pulling up the app and swiping it over the payment terminal. By teaming up, customers can set Discover as their preferred payment method. The press release of this agreement can be found here.
Both of these deals will be catalysts for increased payment volume going forward. I believe allowing customers to pay in any way they choose makes them more loyal to Discover.
With an industry average price-to-earnings of around 20, Discover is trading at a major discount. However, over the last 5 years, its average price-to-earnings is 9.015. This means it is trading right around what it usually does.
The bottom line
Discover Financial is an inexpensive credit card company. It is currently a little over 5% below its 52-week high, so an earnings beat could send the stock to new highs. I believe it can exceed expectations due to an increase in consumer spending, resulting in increased cardholder payment volume. Management has been making all the right moves, and the dividend raise has made it a high-yielder in a low-yield industry. I want to buy Discover on any weakness following the quarter.