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Why Should You Hold Discover Financial (DFS) in Your Portfolio?

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Discover Financial Services (DFS - Free Report) is well-poised for growth owing to the shift in payments to the digital, an attractive core business and its strategic measures.

Over the past 30 days, DFS has witnessed its 2021 and 2022 earnings estimates move 0.1% and 0.5% north, respectively.

Discover Financial’s return-on-equity (ROE) reflects its growth potential. Its trailing 12-month ROE of 45.8% not only improved over the years but also compares favorably with the industry average of 24.8%.

As a direct banking and payment services firm in the United States, Discover Financial is steadily gaining from its digital transition, primarily led by the COVID-19 pandemic.

Here we discuss the reasons for retaining this currently Zacks Rank #3 (Hold) organization in your investment portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

DFS has been gaining traction from its strategic measures. It inked a deal with SIBS MB to enhance the global acceptance of both. With this agreement, Discover, Diners Club International and network alliance cardholders will now be able to use their cards on the SIBS MB network at merchant and ATM points in Portugal.

In May, this financial consumer loans provider entered into an agreement with Eazy Financial Services to bolster acceptance for the cardholders of both companies. Discover Financial leaves no stone unturned to enhance its geographical presence.

DFS’ organic growth contributed to its healthy revenue stream. This upside was mainly driven by its higher net interest income and other total income. Revenues, net of interest income, rose 11% in the first three quarters of 2021. We believe, the metric will recover in the upcoming quarters on the back of its solid market position, expansion in the global payments business and an attractive core business.

DFS’ banking business provides significant diversification benefits and has been performing strongly over the past several years. Discover Financial also boasts a great solvency level on the back of which it resumed its share buyback plan in January this year. Recently, the board of directors increased its quarterly dividend by 14% from 44 cents to 50 cents per share. This should instill investors’ confidence in the stock.

Its net debt-to-capital ratio stands at 18.2X, lower than the industry's average of 34.1X. Its times interest earned stands at 14.2X, higher than the industry's average of 11.8X.

However, DFS’ provision for loan losses increased over the last few quarters due to higher net charge-offs, rise in reserve build, seasoning of newer vintages and constant supply-driven normalization in the consumer credit line.

DFS' earnings estimate for the current year indicates an upside of 388.9% from the year-ago reported figure.

Shares of DFS have rallied 27.9% in a year’s time, underperforming its industry’s growth of 38%.

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Stocks to Consider

Some better-ranked stocks in the finance space are Houlihan Lokey, Inc. (HLI - Free Report) , Mr. Cooper Group Inc. (COOP - Free Report) and Moody's Corporation (MCO - Free Report) , each carrying a Zacks Rank #2 (Buy) at present.

Houlihan Lokey is an investment bank focusing on mergers and acquisitions, financings, financial restructurings and financial advisory services. Houlihan Lokey’s earnings surpassed estimates in each of the last four quarters, the average being 39.53%. The Zacks Consensus Estimate for HLI’s 2022 earnings has moved 2.3% north in the past 30 days.

Cooper Group provides quality servicing, origination and transaction-based services, principally to single-family residences, primarily in the United States. The bottom line of COOP surpassed estimates in three of the trailing four quarters (missing the mark once), the average surprise being 16.1%. The estimate for 2022 earnings has also moved 0.4% north in the past 30 days.

Moody’s Corporation is a leading provider of credit ratings, research, data & analytical tools, software solutions & related risk management services, etc. MCO’s earnings outpaced estimates in three of the last four quarters, missing the mark once, the average surprise being 16.34%. The consensus mark for MCO’s next-year earnings has been revised 0.4% upward in the past 30 days.

Shares of Houlihan Lokey, Cooper Group and Moody’s have gained 56.1%, 35.2% and 37.2%, respectively, in a year.