Is Discover Financial (DFS) Making Money and Taking Risks?

Discover Financial (DFS) is a credit card brand on shaky ground because of its unique business model. To explain, most of Discover’s credit cards are issued in the United States.

Unlike Visa(NYSE: V) and MasterCard (NYSE: MA) Discover only issues its Discover branded products in the United States. However, Discover Financial Services (NYSE: DFS) works with Diner’s Club a historic credit card brand available worldwide.

Discover is taking two huge risks with its America-centric business model. First, most of the economic growth in the foreseeable future will take place outside the USA. Second, I think Discover’s business creates heavy exposure to instability in the American economy.

How Wage Stagnation threatens Discover Financial (DFS)

For instance, they have not resolved most of the conditions that gave rise to the Great Financial Meltdown of 2007-2008. Notably, income inequality and wage stagnation in the United States are not being addressed.

In particular, upper-middle-class wages in the United States increased by just $3an hour between 1979 and 2016, the Brookings Institution claims. Thus,income growth for the people most likely to use credit cards is stagnant in the United States.

Hence, large numbers of Americans are likely to run up huge credit card balances they cannot pay. For example, many families will turn to credit cards for emergency finance in economic distress.

How Medical Bankruptcy Threatens Discover Financial (DFS)

Medical debts driven by high healthcare costs are one on of the greatest threats to Discover Financial (DFS) in the United States.

Markedly,there were 770,846 medical bankruptcies in 2016, the Balance estimates. America has a high-rate of medical bankruptcies because it lacks a government health insurance program for the middle class.

Medical bankruptcies threaten Discover because many Americans rely on credit cards for their health insurance. In detail, people with no health insurance or bad health insurance use the plastic to pay their medical bills then declare bankruptcy.

Financial instability threatens Discover Financial because medical bankruptcy rates increase in bad economic times. For instance, about 1.5 million medical bankruptcies occurred in 2010, the year after the meltdown.

Discover Financial (DFS) is Expanding Globally

Under these circumstances, the wise strategy for Discover is global expansion.Predictably that is exactly what Discover Financial (DFS) is doing.   

To demonstrate, Discover is setting up a Discover Global Network to accept Discover and Diners Club cards worldwide. In fact, a press release indicates Discover is expanding its network with the help of PXP.

PXP is a British company that provides point-of-sale (POS) and other payment solutions for retail and other industries. Thus, Discover’s management understands the danger of overexposure to American markets and is trying to diversify its customer base.

For instance, Discover is expanding in Europe where governments assume most of the risk of medical debt through single-payer health-insurance programs. Hence, it avoids one inherent risk of operating in the United States.

Discover Financial (DFS) has Growing Revenue

Now is a good time for Discover (DFS) to expand because it is making money on growing revenues in the USA.

For instance, Discover reports a gross profit of $1.982 billion on revenues of$1.982 billion for 3rd Quarter 2018. Thus, Discover is in the enviable position of being able to list all its revenue as profit. Therefore,Discover records a gross margin of 100%.

In addition, Discover records an operating income of $967 million and a net income of $600 million for 3rd Quarter 2018. Hence, Discover is making money from its American credit card business.

The international expansion is a good move for DFS right now because it has the resources to pay for it. In particular, Discover had $16.609 billion in cash and equivalents on 30 September 2018.

Beyond that, there was an operating cash flow of $1.606 billion, a financing cash flow of $2.12 billion, and a free cash flow of $1.547 at DFS for 3rdQuarter 2018. So Discover Financial (DFS) is a good a choice if you are looking for a cash-rich company with strong growth prospects.

Is Discover Financial (DFS) a good Dividend Stock?

Discover Financial Services (NYSE: DFS) is also a strong dividend stock.For instance, Discover paid a dividend of 40¢ on December 6, 2018.

Moreover,that dividend increased by 5¢ in 2018. To demonstrate, DFS paid a 35¢ dividend on April 20, 2018.

DFS als delivers good stock dividend data. For instance, there was a dividend yield of2.46%, an annualized payout of $1.60 and a payout ratio of 20.5% on 6 December 2018. Finally, Discover is completing seven years of dividend growth.

I think Discover was under-priced at $65.06 a share on 10 December 2018. If you are looking for a bargain in credit-card stocks, investigate Discover. This moneymaker has strong growth prospects and shrewd management behind its cards.