Discover Financial Services’ (NYSE:DFS) share price has recovered from a substantial pullback last year and seems ready to attempt additional gains.
After hitting its all-time low in the aftermath of the 2008 financial crisis, Discover Financial Services’ share price rose more than 13-fold with minimal volatility from 2009 through the end of 2014. Since 2015, the share price has experienced significantly higher volatility. However, it was still able to advance and reach new all-time highs. Can this uptrend continue?
The 50-day and 200-day moving averages suggest that continued growth is a real possibility. In addition to a favorable indication from the moving averages, the current share price also has more than 11% room on the upside before it reaches analysts’ average target price of $87. Furthermore, nearly two-thirds of analysts covering the stock — 16 out of 25 — have a “Buy” (8) or “Strong Buy” (8) recommendation. Just one analyst issued an “Underperform” recommendation and eight more are suggesting a “Hold”.
After delivering strong results for the full-year 2018, including 7% revenue growth and a 31% increase in diluted earnings per share, Discover Financial Services also reported robust results for the first quarter of 2019. Like for the full-year 2018, first-quarter 2019 revenues advanced 7% year-over-year. Revenue increased from $2.575 billion last year to $2.763 for the most recent period.
Operating expenses increased by only 6%, which translated to a net income growth of 9%, or an increase from $666 million last year to $726 million this yera. Current earnings per share (EPS) of $2.15 are 18% higher than the $1.82 EPS one year ago. Additionally, the current EPS has managed to beat Wall Street analysts’ expectations of $2.02 by 6.4%.
Discover Financial Services (NYSE:DFS)
Based in Riverwoods, Illinois, and founded in 1960, Discover Financial Services operates as a direct banking and payment services company in the United States. The company’s Direct Banking segment offers Discover-branded credit cards to individuals, as well as other consumer products and services, including private student loans, personal loans, home equity loans and so on. Additionally, this segment also offers deposit products, such as certificates of deposit, money market accounts, savings accounts, checking accounts and individual retirement arrangement certificates of deposit. The Payment Services segment operates the Discover Network, which processes transactions for Discover-branded credit cards and provides payment transaction processing and settlement services. Additionally, this segment also operates the PULSE network, which is an electronic funds transfer network that provides financial institutions that issue debit cards on a network with access to automated teller machines and point-of-sale terminals. Furthermore, this segment also operates Diners Club International — a payments network that issues Diners Club branded charge cards and provides card acceptance services.
Discover Financial Services began dividend distributions in the last quarter of 2007 — just before the financial crisis. After just six quarters of dividend distributions, the company had to cut its quarterly payout by two-thirds for the second quarter of 2009. Then, the company paid a minimal dividend of $0.02 for eight consecutive quarters. In the second quarter of 2011, Discover Financial Services initiated the first in a series of consecutive annual dividend hikes. Since this first hike, the company has boosted its annual payout every year for the past nine consecutive years.
The current $0.40 quarterly dividend payout is 14.3% above the $0.35 quarterly distribution from the same period last year. Since resuming dividend hikes in 2011, the company has advanced its total annual distribution amount 20-fold. This level of dividend advancement corresponds to an average growth rate of almost 40% per year.
The current quarterly payout amount converts to a $1.60 annualized distribution and a 2.05% forward dividend yield. Despite the robust growth of the annual dividend payouts, the company’s current yield is just 7.8% above the company’s own 1.9% dividend yield average over the past five years. While trailing the 3.08% average yield of its peers in the Financials sector, Discover Financial Services’ current 2.05% dividend yield is just marginally higher than 2.04% simple average yield of the entire Credit Services industry segment.
Investors who are convinced that dividend payout growth will continue and that the share price can sustain its current uptrend, should conduct their due diligence quickly. Claiming stock ownership prior to the company’s next ex-dividend date on May 23, 2019 will ensure eligibility for the next round of dividend distributions on the June 6, 2019 pay date.
Although the company strove to shake some of the volatility that it experienced over the past few years in order to establish a stable uptrend, its share price traded relatively flat in the first five month of the trailing year and failed to break above the $80 level. Unfortunately, before the share price had a chance to move higher, the overall market correction in the last quarter of 2018 pushed the Discover Financial Services stock price down toward its 52-week low of $55.09 by December 24, 2018.
After that decline of more than 31%, the share price reversed direction and settled into a steady uptrend with significantly less volatility than it experienced in the first half of the trailing 12-month period. After the direction reversal on Christmas Eve, the share price advanced nearly 50%, broke above the $80 resistance level and reached its new all-time high of $82.27 on May 3, 2019. Since peaking at the beginning of May, the share price pulled back 5% to close on May 16, 2019 at $78.12.
At this level, the closing price finally fully recovered from all losses that it had experienced during the trailing 12 months. The May 16, 2019 closing price was slightly less than 1% higher than it had been one year earlier and also was nearly 42% above the 52-week low from late December 2018. Although suffering several pullbacks, the share price was able to increase 36% over the past five years.
While one-year share price gains turned positive at the last moment, more than two-thirds of Discover Financial Services’ 3% total returns over the trailing 12 months came from dividend income distributions. Despite rising annual dividend payouts, the share price growth of only 36% limited five-year total returns to just 48%. However, Discover Financial Services delivered total returns of 50% over the past three years.
Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.