(DFS) Discover Financial Services Sanctions $1 Billion Buyback

Yesterday, the board of Discover Financial Services (DFS) approved and authorized a two-year share repurchase program worth $1 billion with an expected expiry on June 14, 2013.

Although the approval is effective immediately, the buyback of its shares will be held from time to time through open market operations, depending on the market conditions.

Over the last few quarters, Discover has been benefiting from the growth in the loan loss reserve release as well as gains from the payments business that drove the credit card sales volumes. Alongside, higher consumer spending and merchant acceptance also contributed to the increase.

These factors have not only generated operating efficiencies but also helped the company implement capital bolstering initiatives, which in turn enhanced its excess capital for deployment in growth opportunities.

Being the fourth largest credit card lender and processing network in the US, Discover has been growing inorganically too through the recent acquisition of Student Loan Corp. from Citigroup Inc. (C).

The acquisition also comes in line with the company’s long term goal of reinforcing its private student loan portfolio, which has grown steadily over the past three years when many others had to discontinue the business altogether. The deal is expected to shore up the bottom line from the first year of purchase, carrying an earnings increment of at least $0.09 per share in 2011.

These business and capital bolstering initiatives have helped Discover overcome the challenges caused due to the financial crisis, while holding a healthy cash position. This is evident from the company’s dividend hike in March this year to 6 cents from 2 cents, in order to return to its dividend payout to the pre-financial crisis level and restore shareholders’ confidence in the stock.

The current stock buyback program further represents Discover’s efficient capital deployment strategy. However, the CARD Act and the proposed limit on  debit interchange fees by the Fed, along with higher-than-expected expenses is expected to hurt the profits of the company in future. Nevertheless, Discover’s extensive network, sound capital position and cost containment initiatives will help accentuate growth over the long term.

The company is expected to release its second-quarter earnings before the market opens on June 23, 2011. According to the Zacks Consensus Estimate, earnings are expected to increase 7.8% year over year to 66 cents per share.

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