Shareholders to Gain at Discover Financial - Analyst Blog

Following the announcement by the U.S. Federal Reserve that most banks, including Discover Financial Services DFS have passed the annual capital stress test with flying colours, this direct banking and payment services' company publicized its plans to accelerate share buyback and increase dividend pay-out.

Out of the 30 banks that were put to the annual capital test, Zions Bancorp. ZION was the only lender to have failed the review. On the other hand, Discover Financial has successfully fulfilled the 5% requirement for top-tier capital in the final round of stress tests.

Moreover, basking after a fundamentally strong 2013, the company now plans to expand it share repurchase authorization up to $1.6 billion by Mar 2015, higher than $1.3 billion of stock bought back during 2013.

Additionally, Discover Financial projects to raise its quarterly dividend pay-out by about 20% to 24 cents per share from the current 20 cents. A strong business management and future outlook influenced management to hike dividend by 43% in Apr 2013. Previously, the company had increased its dividend twice in 2011 and once in 2012.

As well, return on equity (ROE) of 34% at the end of 2013, compared with 26% at year-end 2012, along with a Tier 1 common capital ratio of 14.3% at 2013-end, up from 13.6% at 2012-end, reflects a sustained and sturdy capital position going forward.

With a strong liquidity and healthy capital ratios, we believe that the latest expansion plans in Discover Financial's capital deployment strategy is also in concurrence with maintaining its market position and shareholder confidence. However, a final nod from the regulators is expected by Mar 26, 2014, when results of the second round will be declared.

Along with Discover Financial, Tree.Com Inc. TREE and Cash America International Inc. CSH are some of the favorably placed stocks in the financial sector. All of these carry a Zacks Rank #2 (Buy).