Shares of Discover Financial Services DFS shot up 3.5% over a single trading session to close at $59.88, soon after the Board of Governors of the Federal Reserve System approved the company’s capital plans for the coming quarters through Jun 30, 2016. The latest plan is subject to approval by the board of directors of Discover Financial in the April board meeting.
The Capital Plan
Per plans, once it receives approval, Discover Financial will raise its quarterly cash dividend by 16.7% and buy back shares up to $2.2 billion during the last three quarters of 2015 and the first two quarters of 2016.
Dividends
The increased dividend should translate into a quarterly cash dividend of 28 cents per share, up from 24 cents paid on Feb 19, 2015. Discover Financial is a regular dividend payer and has been raising its dividends at different intervals to enhance shareholders’ value.
If approved, the upcoming dividend hike would represent the sixth one since Mar 2011 and the payout would translate into a 5-year CAGR of 69.5% from 2010 to 2015. Discover Financial would then have to shell out $1.12 per share annually. Based on the closing share price of $59.88 on Mar 12, 2015, the scheduled dividend hike should imply an annual dividend yield of 1.87%, which is better than the present industry yield of 1.02%.
Share Buyback
If Discover Financial’s expected $2.2 billion buyback over the five quarters ending Jun 30, 2016 is approved, it plans to repurchase shares worth $1.7 billion in 2015, higher than $1.5 billion deployed for the same in 2014. Previously, the board of directors authorized a $3.2 billion share repurchase program in Apr 2014 that is scheduled to expire in Apr 2016. The projected $2.2 billion repurchase authorization would replace the existing program.
Our Take
Discover Financial has a strong capital position with common equity Tier 1 capital ratio, Tier 1 risk-based capital ratio, total risk-based capital ratio, and Tier 1 leverage ratio– all above the requirements of the Federal Reserve and FDIC, at 2014-end, for a company to be “well-capitalized.” This implies that the company has adequate capital to meet its payout requirements once the aforementioned plans are approved by its board of directors.
Discover Financial has always been upfront in taking up initiatives to boost shareholders’ worth, be it through buybacks or dividend hikes. Once in effect, the dividend hike is likely to boost investor confidence thereby helping in stock price appreciation. On the other hand the enhanced buybacks should reduce the outstanding share count and boost earnings per share.
Zacks Rank
Discover Financial currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the finance industry include Credit Acceptance Corp. CACC, Encore Capital Group, Inc. ECPG and Santander Consumer USA Holdings Inc. SC. All three stocks have a Zacks Rank #2 (Buy).
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