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Recently, the board of Discover Financial Services (DFS - Analyst Report) approved a 43% hike in its quarterly cash dividend to 20 cents per share from 14 cents paid earlier. The increased dividend will be payable on May 23, 2013 to shareholders of record as of May 9, 2013.

The increased dividend implies an annual dividend yield of 1.86%, based on the closing share price of $43.01 as of Apr 16, 2013. Discover Financial will require $110.61 million every quarter ($442.44 million annually) to pay the new dividend, based on the outstanding share count of 553 million as of Nov 30, 2012. The company has ample liquidity to pay this dividend, with cash and cash equivalents of $3.49 billion as of Nov 30, 2012.

Discover Financial’s healthy capital and cash position prompts efficient deployment of excess capital. The strong cash position and future outlook influenced management to increase the company’s quarterly dividend twice in 2011 and once in 2012. On Dec 20, 2012, Discover Financial announced a quarterly cash dividend of 14 cents per share, up 40% from 10 cents paid earlier.

The company also regularly repurchases shares to return capital to shareholders. During the fourth quarter of 2012, Discover Financial repurchased 10 million shares for $401 million under its $2 billion share repurchase program.

Discover Financial currently carries a Zacks Rank #2 (Buy). Other companies worth considering in the financial sector are Encore Capital Group, Inc. (ECPG - Snapshot Report), Credit Acceptance Corp. (CACC - Snapshot Report) and Total System Services, Inc. (TSS - Analyst Report). All these companies also carry a Zacks Rank #2 (Buy).

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