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Behind Discover Financial Services’ Discounted Valuations

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Lower valuation multiple

Discover Financial Services (DFS) has a PE (price-to-earnings) ratio on an NTM (next 12-month) basis of 10.26x. The average for its peers is 13.97x. That implies that Discover Financial has a lower valuation. Its peers (XLF) Ally Financial (ALLY), Fidelity National Information Services (FIS), and First Data Corporation (FDC) have PE ratios on an NTM basis of 9.78x, 20.33x, and 11.82x, respectively.

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Discover has opted for certain actions in regard to the new US tax law, which has cost it $189 million. That may be the main reason for the company’s lower valuations. Its payment services segment generated pre-tax income of $29 million in 4Q17, which represents a rise of $14 million compared to 4Q16, mainly due to a rise in transaction processing and interchange revenue and lower operating expenses.

The payment services segment’s total transaction dollar volumes were $54 billion in 4Q17, which represents a rise of 17% on a YoY basis. However, transaction dollar volumes in regard to the PULSE network stood at $42.4 billion in 4Q17, implying a rise of 19% on a YoY basis.

Price target and quarterly payouts

Discover Financial has a one-year price target of $89.08, which represents a rise of 10% from the current market price of $80.98. The company has increased its quarterly payout. In April 2017, it declared a quarterly dividend of $0.30 per share, and in July 2017, it declared $0.35 per share. In October 2017, it declared $0.35 per share.

On January 18, 2018, Discover Financial declared a quarterly dividend payout of $0.35 per share to be paid on March 8, 2018.

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