A research note was published on Thursday in which Burke and Quick Partners changed their ratings for Discover Financial Services (NASDAQ:DFS). From the previous rating “outperform”, the company stock was upgraded to “market perform”. Because of the attractive stock valuation and the positive CCAR – Comprehensive Capital Analysis and Review – Burke and Quick Partners upgraded their rating. According to the firm, Discover Financial (NASDAQ:DFS), by next year, will be paying out excessive capital.
When the results were announced for the last round of CCAR and stress test on Wednesday, Federal Reserve concluded the announcement. The investors and analysts had been keenly observing the results and the movements in the banks’ stocks after the results were announced. This test is conducted on an annual basis to ensure that the banks have sufficient capital in order to survive stress conditions, i.e. economic downturns. Those bank holding companies which are able to clear tests can then increase their share buy backs and dividends on the shares. Discover Financial Services (NASDAQ:DFS) is among the lucky companies that passed this fed test this year. The measurements for Tier 1 common ratio are made on the basis of a hypothetical stress condition. According to the measurement, the ratio for Discover Financial Services (NASDAQ:DFS) increased from 8.7% last year to 10.4%.
Michael Taiano, an analyst at Burke and Quick Partners said that Discover Financial Services (NASDAQ:DFS)’s payout ratio is 96% of the earnings in the five quarters that will end with 2QFY16. Meanwhile, American Express Company’s (NYSE:AXP) payout ratio for the same period is 100% of the expected income. Mr. Taiano also concluded that the Fed have softened over their limitation that banks cannot return more than 100% of their income to the shareholders in the form of dividends or even share repurchase programs.
Meanwhile Mr. Taiano is also expecting Discover Financial Services (NASDAQ:DFS) to reduce their excess cap positions for the future CCAR. He is of the belief that this excess capital is what is limiting the earnings growth. Freeing this capital may lead to a growth in earnings.
The CEO and Chairman of the company, David Nelms, said that they are announcing an increase in buyback program and dividends. The capital strength of Discover Financial Services (NASDAQ:DFS) will allow it to buy back shares worth about $1.7 billion in the current fiscal. The dividends will be increased to 28 cents this year which is 4 cents up from last year. The plan for the current year includes a buyback program worth about $2.2 billion. The board of directors of the company will meet in April to decide and approve of the new schemes.
Also, Burke and Quick partners increased their estimates on EPS of Discover Financial Services (NASDAQ:DFS) to $5.35 for 2015 and $5.54 for 2016. Mr. Taiano thinks that Discover Financial Services (NASDAQ:DFS) is in a good position to survive the hike in interest rates that will be announced by the Feds. This rise will alleviate some of the competitive pressure on the company’s near-time earnings.
