Discover Financial Up on Div Hike, Buyback - Analyst Blog

Shares of Discover Financial Services DFS moved up 0.6% to $56.86 per share in the one-day trading session post the announcement of a dividend hike and share repurchase on April 16, 2014. This banking and payment services giant increased its quarterly cash dividend by 20% and simultaneously authorized a new $3.2 billion share repurchase program.

Dividend

The raised quarterly cash dividend stands at 24 cents per share, up from 20 cents paid on Jan 23, 2014. The revised dividend will be paid on May 22, 2014 to shareholders of record as of May 8, 2014.

Based on the closing share price, the increased dividend implies a dividend yield of 1.69%, better than the industry yield of 1.19% and that of some financial service providers like Capital One Financial Corp. COF with a yield of 1.60% and Cash America International, Inc. CSH with 0.32%.

The last dividend hike was announced in April 2013 where the company recorded a 43% increase in its quarterly dividend. Discover Financial has been constantly hiking its dividend since 2011, which increased at a 3-year CAGR of 58.74%.

Share Repurchase

The new $3.2 billion share repurchase program authorized by Discover Financial will replace the $2.4 billion share repurchase plan authorized in March 2013. Under the old authorization scheduled to expire in March 2015, Discover Financial repurchased shares worth $1.03 billion over the last three quarters of 2013, bringing the total share repurchase to $1.3 billion in 2013. This new program is slated to expire on April 15, 2016.  

Our Take

The dividend hike and the new share repurchase program reflect the financial strength of the company. Discover Financial will have to dish out $114.5 million every quarter for the dividend payment, based on the outstanding share count of 477 million as of Dec 31, 2013. The company has ample liquidity for the payment, with cash and investments of $11.7 billion as of end-2013.

Discover Financial is scheduled to release its first-quarter 2014 earnings results on April 22, 2014, after the closing bell. Our proven model does not conclusively show that Discover Financial is likely to beat earnings this quarter. That is because a stock has a combination of Zacks Rank #3 (Hold) and zero Earnings ESP (Expected Surprise Prediction). A stock needs to have both positive ESP and Zacks Rank #1, 2 or 3 for this to happen.

Another Better-Ranked Player

In the finance sector, better-ranked Endurance Specialty Holdings Ltd. ENH increased its quarterly dividend by 6.25% in Feb 2014 and announced a 5 million share repurchase authorization (through Feb 28, 2016) that replaced the previous 7 million authorization. This stock carries a Zacks Rank #2 (Buy).