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Here's Why You Should Retain Discover Financial (DFS) for Now
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Discover Financial Services (DFS - Free Report) higher receivables growth, record deposit inflows, improving net interest margin, growing top line, digital transformation, and efforts to boost shareholder value make it worth retaining in one’s portfolio.
Discover Financial is a 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 past month, the stock rose 6.9%, matching the industry’s increase.
Image Source: Zacks Investment Research
Return on Equity (ROE)
The ROE of Discover Financial of 27.2% is way higher than the industry average of 12.5%. This reflects its efficiency in utilizing shareholders’ funds.
Rising Estimates
The Zacks Consensus Estimate for DFS’s 2023 earnings per share is pegged at $12.32. The Zacks Consensus Estimate for 2023 revenues is pegged at $15.8 billion, suggesting an 18.2% increase from the year-ago reported figure.
Key Drivers
Discover Financial has witnessed consistent and significant revenue growth for the past few years. Its total revenues increased 22% to $11.7 billion in the first nine months 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 21.1% to total revenues in the first nine months of 2023. Apart from interest income, the company also earns through net discounts, interchange and loan fees. This metric grew 10% 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 recently launched its Cashback Debit product, aiming to capture interchange fees and be able to cross-sell other products in the future.
The company’s Digital Banking segment accounted for the majority of revenues in the first nine months 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 also declared its quarterly dividend of 70 cents per share in 2023. Its dividend yield of 3.2% 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 14% in the first nine months of 2023 due to higher employee compensation, benefits and marketing expenses. DFS expects total operating expenses to rise by low-double digits in 2023.
Discover Financial’s rising provision for loan losses undermines its growth potential. It rose nearly 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.
The Zacks Consensus Estimate for Arch Capital’s 2023 and 2024 earnings indicates year-over-year increases of 58.1% and 1%, respectively. ACGL delivered a four-quarter average earnings surprise of 35.2%. The consensus estimate for 2023 and 2024 earnings has moved up 0.4% and 0.1%, respectively, in the past week.
CNA Financial delivered a four-quarter average earnings surprise of 9.2%. The Zacks Consensus Estimate for CNA’s 2023 and 2024 earnings indicates year-over-year increases of 14.8% and 7.4%, respectively. The consensus estimate for 2023 and 2024 earnings has moved up 2.8% and 5.3%, respectively, in the past 30 days.
HCI Group delivered a four-quarter average earnings surprise of 519.6%. The Zacks Consensus Estimate for HCI’s 2023 and 2024 earnings indicates year-over-year increases of 194.9% and 51.4%, respectively. The Zacks Consensus Estimate for 2023 and 2024 revenues indicates year-over-year increases of 5.5% and 19.5%, respectively.
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Here's Why You Should Retain Discover Financial (DFS) for Now
Discover Financial Services (DFS - Free Report) higher receivables growth, record deposit inflows, improving net interest margin, growing top line, digital transformation, and efforts to boost shareholder value make it worth retaining in one’s portfolio.
Discover Financial is a 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 past month, the stock rose 6.9%, matching the industry’s increase.
Image Source: Zacks Investment Research
Return on Equity (ROE)
The ROE of Discover Financial of 27.2% is way higher than the industry average of 12.5%. This reflects its efficiency in utilizing shareholders’ funds.
Rising Estimates
The Zacks Consensus Estimate for DFS’s 2023 earnings per share is pegged at $12.32. The Zacks Consensus Estimate for 2023 revenues is pegged at $15.8 billion, suggesting an 18.2% increase from the year-ago reported figure.
Key Drivers
Discover Financial has witnessed consistent and significant revenue growth for the past few years. Its total revenues increased 22% to $11.7 billion in the first nine months 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 21.1% to total revenues in the first nine months of 2023. Apart from interest income, the company also earns through net discounts, interchange and loan fees. This metric grew 10% 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 recently launched its Cashback Debit product, aiming to capture interchange fees and be able to cross-sell other products in the future.
The company’s Digital Banking segment accounted for the majority of revenues in the first nine months 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 also declared its quarterly dividend of 70 cents per share in 2023. Its dividend yield of 3.2% 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 14% in the first nine months of 2023 due to higher employee compensation, benefits and marketing expenses. DFS expects total operating expenses to rise by low-double digits in 2023.
Discover Financial’s rising provision for loan losses undermines its growth potential. It rose nearly 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 from the broader Finance space are Arch Capital Group (ACGL - Free Report) , CNA Financial Corporation (CNA - Free Report) and HCI Group, Inc. (HCI - Free Report) . Each company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Arch Capital’s 2023 and 2024 earnings indicates year-over-year increases of 58.1% and 1%, respectively. ACGL delivered a four-quarter average earnings surprise of 35.2%. The consensus estimate for 2023 and 2024 earnings has moved up 0.4% and 0.1%, respectively, in the past week.
CNA Financial delivered a four-quarter average earnings surprise of 9.2%. The Zacks Consensus Estimate for CNA’s 2023 and 2024 earnings indicates year-over-year increases of 14.8% and 7.4%, respectively. The consensus estimate for 2023 and 2024 earnings has moved up 2.8% and 5.3%, respectively, in the past 30 days.
HCI Group delivered a four-quarter average earnings surprise of 519.6%. The Zacks Consensus Estimate for HCI’s 2023 and 2024 earnings indicates year-over-year increases of 194.9% and 51.4%, respectively. The Zacks Consensus Estimate for 2023 and 2024 revenues indicates year-over-year increases of 5.5% and 19.5%, respectively.