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Synchrony - Everything A Value Investor Could Want

Aug. 03, 2018 11:12 PM ETSynchrony Financial (SYF)28 Comments


  • While the loss of possibly its most important customer is undoubtedly a major setback, the decline in the share price is overdone, providing a great buying opportunity.
  • We expect future dividend growth to easily exceed the dividend growth of the S&P 500 in the years ahead.
  • While there is room for improvement in diversifying its customer base, Synchrony has a host of long-standing relationships with a diverse set of retail partners.
  • With a PE of 10.45, stable operating results, and a growing dividend, Synchrony offers value investors everything they are looking for.

Synchrony Financial (NYSE:SYF) is down 22% for the year. The downward move accelerated on July 26th when the company announced that the Walmart (WMT) program agreement would not be renewed and would expire on July 31st, 2019. Retailer arrangements such as the one with Walmart provide for payment to the partner if the economic performance of the program exceeds a threshold defined in the contract. Walmart appears to have demanded better terms that made the deal unattractive for Synchrony. Synchrony provided detail on two alternatives it is considering for its Walmart Portfolio which would both be accretive to earnings and are discussed below.

Walmart Portfolio Options

The first option is to sell the portfolio. Under this option, the portfolio would transfer to the new issuer after the contract expiration at the end of July of 2019. The size of the portfolio is approximately $10 billion, and selling it would free up about $2.5 billion of capital. About $1.5 billion comes from the capital currently supporting the portfolio while some comes from the release reserve associated with the portfolio. Banks are required to hold a certain amount of capital or liquidity to support outstanding loans after estimating the need to cover net charge-offs. The company expects to use the approximately $2.5 billion to repurchase shares. Reducing the outstanding share count combined with the cost savings associated with selling the portfolio is expected to neutralize the EPS impact of losing the program.

The second option is to retain the Walmart portfolio and convert qualifying accounts to general purpose co-brand cards, or GPCCs, beginning in the first quarter of 2019. Cards that are not converted would remain Walmart cards to be used in-brand for up to three years. This approach allows Synchrony to earn royalties on the Walmart cards for three years post contract expiration. Similar to option

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Visit our website: Wall Street for Main StreetAll articles/comments are provided for informational and educational purposes and should not be considered as personalized investment advice. Perform your own due diligence and make your own decisions. Be advised and aware that buying and selling financial instruments involves risk.On the long side, I search for equities trading below their intrinsic value with bright prospects.For the short side, I identify companies burning cash with unattractive business models.Software Engineer Education: - Business Administration (MBA) - BS, Electrical Engineering

Analyst’s Disclosure: I am/we are long SYF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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