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Here's Why You Should Hold Discover Financial (DFS) for Now
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Discover Financial Services’ (DFS - Free Report) higher receivables growth, record deposit inflowsimproving net interest margin, growing top line, digital transformation, and efforts to boost shareholder value make it worth retaining in one’s portfolio.
Discover Financial isa leading digital banking and payment services company in the United States. It offers products like credit cards and personal, student and home loans, as well as deposit products with acceptance in more than 185 countries and territories.
Zacks Rank & Price Performance
DFS currently carries a Zacks Rank #3 (Hold). In the year-to-date period, the stock has lost 0.2%, matching the industry’s decline.
Image Source: Zacks Investment Research
Return on Equity (ROE)
The ROE of Discover Financial of 29.7% is way higher than the industry average of 12.3%. This reflects its efficiency in utilizing shareholders’ funds.
2023 Estimates
The Zacks Consensus Estimate for DFS’s 2023 earnings is pegged at $12.95 per share. The Zacks Consensus Estimate for 2023 revenues is pegged at $15.6 billion, suggesting a 17.1% increase from the year-ago reported figure.
Tailwinds
Discover Financial has witnessed consistent and significant revenue growth for the past few years. Its total revenues increased 24.8% to $7.6 billion in the first half of 2023 due to higher net interest income, continued receivables growth and improving non-interest income.
As the Fed continues to keep a high-interest rate environment to battle inflation, DFS’s top line is expected to grow further. It is to be seen whether the company can sustain its high net interest margin in the future. Discover Financial expects the net interest margin to be 11% in 2023, in line with the 2022 reported figure.
Non-interest income contributed 17.2% to total revenues in the first half of 2023. The company also earns through net discount, interchange and loan fees apart from interest income. This metric grew 7% in the digital banking business due to a higher volume of late payments and improved discount and interchange revenues. This figure is expected to rise further as the loan is expected to grow in the mid-teens for 2023.
The company’s Digital Banking segment accounted for the majority of revenues in the first half of 2023. It is expected to witness growth accompanied by further moderation in payment rates. Non-card products in the Digital Banking segment include loans provided to individuals through organic student loans, personal loans and credit card loans. DFS’s appealing value proposition and disciplined marketing approach position it well for growth, along with strong consumer demand.
Improved transaction processing revenues from higher PULSE and Diners Club volume should provide an impetus to the Payment Services segment. Also, the company continues to expand its Discover Global Network through partnerships. DFS announced five partnerships in the Asia-Pacific region to bolster its international presence.
The company manages its excess capital well through share repurchases and debt repayment. It bought back shares worth $700 million in the second quarter. It also declared its quarterly dividend of 70 cents per share in 2023. Its dividend yield of 3.1% is higher than the industry average of 2.7%. Hence, Discover Financial is a good option for an investor looking for returns in the form of dividends.
Key Concerns
There are a few factors that have been impeding the stock’s growth lately.
Rising costs can trim its margins. DFS’s total expenses rose 18.4% in the first half due to higher employee compensation, benefits and marketing expenses.
Discover Financial’s rising provision for loan losses undermines its growth potential. It rose more than two-fold year over year, reflecting high expectations of bad loans in the future. Nevertheless, we believe that a systematic and strategic plan of action will drive growth in the long term.
Fidus Investment’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 9.5%. The Zacks Consensus Estimate for FDUS’s 2023 earnings suggests an improvement of 30.3%, while the same for revenues suggests growth of 35.4% from the corresponding year-ago reported figures. The consensus mark for FDUS’s 2023 earnings has moved 5.6% north in the past 60 days.
The bottom line of Invesco Mortgage outpaced estimates in each of the last four quarters, the average surprise being 54.2%. The Zacks Consensus Estimate for IVR’s 2023 earnings suggests an improvement of 1.1% from the year-ago reported figure. The consensus mark for IVR’s 2023 earnings has moved 18.4% north in the past 60 days.
New Mountain Finance’s earnings surpassed estimates in two of the trailing four quarters and matched the mark twice, the average surprise being 2.2%. The Zacks Consensus Estimate for NMFC’s 2023 earnings suggests an improvement of 23.4%, while the same for revenues suggests growth of 28.8% from the corresponding year-ago reported figures. The consensus mark for NMFC’s 2023 earnings has moved 3.3% north in the past 60 days.
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Here's Why You Should Hold Discover Financial (DFS) for Now
Discover Financial Services’ (DFS - Free Report) higher receivables growth, record deposit inflowsimproving net interest margin, growing top line, digital transformation, and efforts to boost shareholder value make it worth retaining in one’s portfolio.
Discover Financial isa leading digital banking and payment services company in the United States. It offers products like credit cards and personal, student and home loans, as well as deposit products with acceptance in more than 185 countries and territories.
Zacks Rank & Price Performance
DFS currently carries a Zacks Rank #3 (Hold). In the year-to-date period, the stock has lost 0.2%, matching the industry’s decline.
Image Source: Zacks Investment Research
Return on Equity (ROE)
The ROE of Discover Financial of 29.7% is way higher than the industry average of 12.3%. This reflects its efficiency in utilizing shareholders’ funds.
2023 Estimates
The Zacks Consensus Estimate for DFS’s 2023 earnings is pegged at $12.95 per share. The Zacks Consensus Estimate for 2023 revenues is pegged at $15.6 billion, suggesting a 17.1% increase from the year-ago reported figure.
Tailwinds
Discover Financial has witnessed consistent and significant revenue growth for the past few years. Its total revenues increased 24.8% to $7.6 billion in the first half of 2023 due to higher net interest income, continued receivables growth and improving non-interest income.
As the Fed continues to keep a high-interest rate environment to battle inflation, DFS’s top line is expected to grow further. It is to be seen whether the company can sustain its high net interest margin in the future. Discover Financial expects the net interest margin to be 11% in 2023, in line with the 2022 reported figure.
Non-interest income contributed 17.2% to total revenues in the first half of 2023. The company also earns through net discount, interchange and loan fees apart from interest income. This metric grew 7% in the digital banking business due to a higher volume of late payments and improved discount and interchange revenues. This figure is expected to rise further as the loan is expected to grow in the mid-teens for 2023.
The company’s Digital Banking segment accounted for the majority of revenues in the first half of 2023. It is expected to witness growth accompanied by further moderation in payment rates. Non-card products in the Digital Banking segment include loans provided to individuals through organic student loans, personal loans and credit card loans. DFS’s appealing value proposition and disciplined marketing approach position it well for growth, along with strong consumer demand.
Improved transaction processing revenues from higher PULSE and Diners Club volume should provide an impetus to the Payment Services segment. Also, the company continues to expand its Discover Global Network through partnerships. DFS announced five partnerships in the Asia-Pacific region to bolster its international presence.
The company manages its excess capital well through share repurchases and debt repayment. It bought back shares worth $700 million in the second quarter. It also declared its quarterly dividend of 70 cents per share in 2023. Its dividend yield of 3.1% is higher than the industry average of 2.7%. Hence, Discover Financial is a good option for an investor looking for returns in the form of dividends.
Key Concerns
There are a few factors that have been impeding the stock’s growth lately.
Rising costs can trim its margins. DFS’s total expenses rose 18.4% in the first half due to higher employee compensation, benefits and marketing expenses.
Discover Financial’s rising provision for loan losses undermines its growth potential. It rose more than two-fold year over year, reflecting high expectations of bad loans in the future. Nevertheless, we believe that a systematic and strategic plan of action will drive growth in the long term.
Stocks to Consider
Some better-ranked stocks in the Finance space are Fidus Investment Corporation (FDUS - Free Report) , Invesco Mortgage Capital Inc. (IVR - Free Report) and New Mountain Finance Corporation (NMFC - Free Report) . Each of these companies presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fidus Investment’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 9.5%. The Zacks Consensus Estimate for FDUS’s 2023 earnings suggests an improvement of 30.3%, while the same for revenues suggests growth of 35.4% from the corresponding year-ago reported figures. The consensus mark for FDUS’s 2023 earnings has moved 5.6% north in the past 60 days.
The bottom line of Invesco Mortgage outpaced estimates in each of the last four quarters, the average surprise being 54.2%. The Zacks Consensus Estimate for IVR’s 2023 earnings suggests an improvement of 1.1% from the year-ago reported figure. The consensus mark for IVR’s 2023 earnings has moved 18.4% north in the past 60 days.
New Mountain Finance’s earnings surpassed estimates in two of the trailing four quarters and matched the mark twice, the average surprise being 2.2%. The Zacks Consensus Estimate for NMFC’s 2023 earnings suggests an improvement of 23.4%, while the same for revenues suggests growth of 28.8% from the corresponding year-ago reported figures. The consensus mark for NMFC’s 2023 earnings has moved 3.3% north in the past 60 days.