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Stock Spotlight

Discover: The stock that pays you back

Recent Price
P/E Ratio
Shares (millions)
Long-Term Debt as % of Capital
52-Week Price Range
$81.93 - $63.31

Back in 1986, the Discover card stirred up a storm by offering a small rebate on purchases. Discover wasn’t the first cash-back card, but its prominence as the in-house credit vehicle of retail giant Sears sparked other issuers to start offering perks, such as frequent-flier miles, cash bonuses for opening accounts, and periods of lower interest.

Eleven years after going public, Discover Financial Services ($70; DFS) has nearly $67 billion in credit card loans outstanding, with an average interest rate of 12.9%. But there’s more to Discover than its eponymous credit cards.

Credit cards remain Discover’s most important business, generating 82% of net interest income and 80% of company revenue. Yet Discover also issues student loans (7% of interest income) and personal loans (8%), and operates a payment processor (4% of company revenue).

Discover, which earns a Quadrix® Overall rank of 95 is a Buy and a Long-Term Buy.

Borrowing growth

While Discover probably never meant to kick off a card-rewards arms race, the company has long delivered consistent performance in that race. Discover continues to gain share in the credit-card market, helped by aggressive advertising spending and improvements to the rewards program that have reduced customer attrition and boosted satisfaction rates.

Over the last three years, Discover’s sales rose at an annualized rate of 7%, while per-share profits increased at a 9% clip. Credit that top-line growth to strong demand for both credit cards and student loans. In August, U.S. consumers had $1.04 trillion in revolving debt outstanding, up 4% from a year ago and 14% from three years ago. And in July, according to the Bureau of Consumer Financial Protection, students borrowed $16.6 billion, a 12-year high.

Most economists expect growth in card volumes to moderate over the next year but remain positive. Consensus estimates project sales growth of 6% and earnings-per-share growth of 10% for Discover in 2019, reasonable targets considering the company’s history. Discover was slated to release September-quarter results on Oct. 25. Analysts targeted gains of 7% in sales and 29% in per-share profits.

Giving back

Over the last five years, Discover has spent more than $9 billion buying back its own shares, shrinking the share count 29% along the way. Those buybacks have allowed Discover to keep posting per-share-profit growth faster than revenue growth despite cost pressures. In July, the company announced a new $3 billion buyback plan. Discover has also boosted its dividend every year since 2011, most recently a 14% increase in July, paying out $2.5 billion over the last five years. The shares yield 2.3%.

Given Discover’s robust operating cash flow — $6.0 billion in the last 12 months, up 29% over the last year and 11% annualized over the last five — we expect both the buybacks and the dividend growth to continue.

You can obtain an annual report for Discover Financial Services at 2500 Lake Cook Road, Riverwoods, IL 60015, (224) 405-0900,


Quarter Per-Share Earnings Sales Change Quarterly Price Range P/E Ratio Range
Jun '18 $1.91 vs. $1.40 10% $78.97 - $68.48 12 - 11
Mar '18 1.82 vs. 1.43 12% 81.93 - 69.55 14 - 12
Dec '17 1.55 vs. 1.40 12% 77.79 - 63.31 13 - 11
Sep '17 1.59 vs. 1.56 11% 64.73 - 57.50 11 - 10

Year (Dec.) Sales (Bil.) Per-Share Earnings* Per-Share Dividend 52-Week Price Range P/E Ratio Range
2017 $11.55 $5.97 $1.30 $77.79 - $57.50 13 - 10
2016 10.50 5.78 1.16 73.62 - 42.86 13 - 7
2015 10.00 5.13 1.08 66.02 - 50.20 13 - 10
2014 9.79 5.22 0.92 66.75 - 51.63 13 - 10

Quadrix Scores
Overall Momentum Value Quality Financial Strength Earnings Estimates Performance
95 70 93 83 70 64 47

* Earnings exclude special items.
NA Not Available.
† Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.

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Stock Spotlight

Discover: The stock that pays you back

Wednesday, November 14, 2018

Back in 1986, the Discover card stirred up a storm by offering a small rebate on purchases. Discover wasn't the first cash-back card, but its prominence as...

Read More from Stock Spotlight

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