2 Financials Beating the Street

07/01/2013 9:45 am EST


David Fried

Editor, The Buyback Letter

Financial companies are looking attractive these days, and two are rewarding their shareholders with buybacks and rising prices, says David Fried of The Buyback Letter.

Our portfolio—based on stocks that have announced share buyback programs—is beating the S&P 500 by more than 77% since its inception in 2000.

Two of our latest additions to this portfolio are in the financial sector—Discover Financial Services (DFS), where management has reduced shares outstanding by 6.2% in the last 12 months, and State Street (STT), whose management has reduced shares outstanding by 6.4% over the last year.

Discover Financial is a direct banking and payment services company with one of the most recognized brands in US financial services. We last bought the stock in October 2012, and sold it two months later for a small gain.

Begun in 1986, the company has become one of the largest card issuers in the US, operating the Discover card, loans (home, private student, and personal), online savings accounts, certificates of deposit, and money market accounts through its direct banking business.

Its payment businesses consist of Discover Network, PULSE (a leading ATM/debit network), and Diners Club International, a global payments network in more than 185 countries and territories.

Discover has a market cap of $22.5 billion and a P/E ratio of 10.3, below the S&P 500 P/E ratio of 17.7. Shares are up about 19% year to date, and analysts praise it for revenue growth, solid stock price performance, growth in earnings per share, increase in net income, and expanding profit margins.

Discover Financial is up more than 396% since the end of 2008, far outpacing the 97% gain in the S&P 500 over the same time. Highlights from the recent quarter (comparisons are year over year):

  • Net operating revenue grew 10%
  • Net interest income grew 9%
  • Card receivables grew 5%
  • Private, student, and personal loans grew 10% as a whole
  • EPS grew 10%, driven primarily by loan growth and share repurchases

Meanwhile, financial holding company State Street provides investment servicing and investment management services to institutional investors worldwide. It has a market cap of $27.5 billion.

It hit a 52-week high recently, and shares are up 28% year to date. The company has a P/E ratio of 13.9, below the S&P 500 P/E ratio of 17.7. Analysts like its solid stock price performance, impressive record of earnings per share growth, increase in net income, attractive valuation levels, and expanding profit margins.

State Street said its first-quarter net income on an operating basis rose 8% to $443 million, or 96 cents a share, from a year earlier.

Joseph Hooley, State Street's chief executive officer, has shifted his focus over the past two years away from acquisitions to returning capital to shareholders. He has raised the company's quarterly dividend by 44% in the past 14 months and stepped up share repurchases.

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