DFS Discover Financial Services

On Tuesday, the board of Discover Financial Services (DFS) authorized a $2 billion share repurchase program dated to expire on March 22, 2014. The board, however, has the power to terminate the program before the stipulated time. The buybacks will be held periodically, depending on the market conditions and will be subject to legal and regulatory restrictions.

Discover’s new share repurchase program will replace the existing $1 million program, announced in June 2011. The old program was set to expire in June 2013, but will be terminated prematurely.

During 2011, Discover had repurchased 18 million shares for an aggregate price of $425 million under its old repurchase program.

Concurrently, Discover declared a quarterly cash dividend of 10 cents per share, payable on April 19, 2012 to shareholders of record as of April 5, 2012. The company had hiked its quarterly dividend by 67% from 6 cents per share in December 2011.

Discover has a healthy capital and cash position, which facilitates the maintenance of an efficient capital deployment strategy. The company utilizes its excess capital for strategic acquisitions, apart from share buybacks and dividend payments. Moreover, the strong cash position prompted management to increase Discover’s dividend twice in 2011.

Most of the card companies follow a regular capital deployment strategy to enhance shareholder value. Discover’s rival American Express Company (AXP) also revealed its intention to spend as much as $5 billion on stock repurchase in 2012.

Investors reacted positively to the news of an increase in the repurchase authorization, leading to a 4% hike in the share price to $32.02 at the close of the market on March 13, 2012 on the New York Stock Exchange.

The Zacks Consensus Estimate for the company’s first-quarter 2012 earnings is currently pegged at 88 cents per share, up about 5% year over year. For full-year 2012, the Zacks Consensus Estimate stands at $3.40 per share, down 16% from 2011.

Currently, Discover carries a Zacks #1 Rank, implying a Strong Buy’ rating for the short term. Considering the fundamentals, we maintain our long-term ‘Outperform’ recommendation on the stock.

 
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