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Discover Financial Announces Stress Capital Buffer Results

Zacks

Discover Financial Services DFS recently announced results for the Federal Reserve’s 2020 supervisory stress testing and capital plan review exercise. The company’s preliminary stress capital buffer (SCB) has been set at 3.5%.

The final SCB results for Discover Financial as well as other firms are subject to Federal Reserve’s capital plan rule, which will be finalized in August and effective Oct 1, 2020.

Although the company has been suffering from the economic slowdown caused by the COVID-19 pandemic, it managed to maintain a healthy capital position. Over the years, it implemented several capital-boosting initiatives including equity and debt offerings, which helped the company achieve a strong capital base. The solid capital and cash status facilitates efficient deployment of excess capital through acquisitions, share repurchases and dividend payouts.

Pending certain approvals, Discover Financial has plans to continue with its dividend payouts with a clearance of 44 cents per share for the third quarter of 2020. Its current dividend yield stands at 3.6%, higher than its industry's metric of 2.8%. Although the company suspended its share buyback plan in March and refrains from repurchases in the third quarter as well, we are hopeful that it will resume the action once things bounce back to normalcy.

Subject to the SCB and other conditions, the company will take share repurchase measures.

The company's solvency level remains impressive. Net debt is 41.6% (almost in line sequentially) of its total capital, lower than the industry average of 48.8%. Its times interest earned now is 4.1X (in line sequentially), better than the industry average of 2.7X. As of Mar 31, 2020, it had cash and cash equivalents of $1 billion and credit facilities through private providers of $6 billion, higher than its long-term debt of $2.6 billion. It also has $35 billion in borrowing capacity at the Federal Reserve discount window. Thus, its balance sheet looks strong.

The company is well-poised for growth on the back of its business mix, capital efficiency, healthy revenue stream, growing PULSE network, etc.

Zacks Rank and Price Performance

Shares of this currently Zacks Rank #3 (Hold) company have lost 35.5% in a year’s time, wider than its industry’s decline of 29.4%.

Other companies in the same space, such as Synchrony Financial SYF, Ally Financial Inc. ALLY and American Express Company AXP have also lost 35.5%, 23.1% and 35.8%, respectively, in the same time frame. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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