Last update on 2024-06-28

Discover Financial Services (DFS) - Dividend Analysis (Final Score: 5/8)

Discover Financial Services (DFS) dividend analysis, scored 5/8, examines the performance and stability of their dividend policy with an 8-criteria evaluation.

Short Analysis - Dividend Score: 5

We're running Discover Financial Services (DFS) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The dividend analysis for Discover Financial Services (DFS) over an 8-criteria scoring system resulted in a score of 5. The criteria include: Dividend Yield (just below industry average but generally increasing), Dividend Growth Rate (average of 26.73% with significant fluctuations), Payout Ratio (well below the 65% threshold), Coverage by Earnings (consistently strong), Coverage by Cash Flow (weak and inconsistent), Stability (mostly increasing with minor drops during crises), Duration (17 years, not meeting the 25-year benchmark), and Stock Repurchases (consistent and value-adding with minor deviations).

Insights for Value Investors Seeking Stable Income

Discover Financial Services (DFS) shows a mixed picture. The company has demonstrated strong dividend yield growth, low payout ratios, and reliable earnings coverage. However, the inconsistency in cash flow coverage and the relatively shorter dividend history (17 years) are concerns. If you are looking for steady dividend income, DFS might be slightly risky due to cash flow issues, but it still shows potential for future growth. It's worth a deeper look if you can accept some risk for potentially higher returns.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield is a crucial metric for income-focused investors as it indicates the annual dividend payment relative to the stock price.

Discover Financial Services (DFS) shows a current dividend yield of 2.4021%, which is slightly below the industry average of 2.43%. Over the past 20 years, DFS's dividend yield has displayed significant growth from near-zero levels in the early 2000s to surpassing the industry average in multiple years. For instance, in 2008 it significantly increased to 2.5184%, reflecting the company's resilience and commitment to returning value to shareholders even during financial crises. The consistent increment in Dividend per Share, especially reaching $2.70 in 2023 from $2.30 in 2022, further validates this. Although currently under the industry average, this upward trend in both dividend yields and absolute dividends per share is commendable, signaling a potential for strong future performance. Hence, this trend is positively good, reflecting DFS’s robust dividend strategies over time.

Average annual Growth Rate higher than 5% in the last 20 years?

Dividend growth rate is a measure of how much an investor's dividend payments have increased over a specified period. A higher growth rate indicates a healthy and expanding dividend policy.

Discover Financial Services (DFS) has had considerable fluctuations in its annual dividend growth rate over the past 20 years. While certain years have seen substantial increases, such as 250% in 2011 and 100% in 2008, other years have experienced negative growth, such as -66.6667% in 2009 and -6.8966% in 2015. Despite these fluctuations, the average dividend growth rate stands at approximately 26.73%, which is significantly higher than the 5% threshold. This indicates strong growth in dividend payments, reflecting positively on the company's financial health and shareholder returns. The overall trend can be seen as a good sign for investors, although the year-to-year volatility does highlight some risk elements.

Average annual Payout Ratio lower than 65% in the last 20 years?

Criterion 1.2 evaluates whether the average payout ratio over the last 20 years is lower than 65%. The payout ratio indicates the proportion of earnings a company distributes to shareholders in the form of dividends. A lower ratio suggests that the company retains more profit for growth and investment.

The average payout ratio for Discover Financial Services (DFS) over the past 20 years is approximately 13.28%, which is significantly lower than the 65% threshold. This is a positive indicator, suggesting that DFS retains a substantial portion of its earnings for growth and reinvestment. The stability of maintaining a payout ratio well below the benchmark over such a long period reflects strong financial management and the ability to balance rewarding shareholders while ensuring sufficient capital for operational needs and future opportunities. This is bolstered by the annual figures, which show a consistently low payout ratio, further solidifying the company's financial soundness and sustainable dividend policy.

Dividends Well Covered by Earnings?

Dividends being well covered by earnings means that the company consistently generates sufficient profits to pay out dividends without jeopardizing its financial stability.

For Discover Financial Services (DFS), analyzing the Earnings per Share (EPS) and Dividends per Share (DPS) from 2003 to 2023 reveals an average cover ratio that generally exceeds the conservative safety threshold of 2.0 times. From 2008 onwards, EPS has consistently grown with dips, particularly during the 2020 pandemic year. For instance, in 2021, EPS was 18.07 while DPS was 1.88, yielding a coverage ratio of approximately 9.6 times, indicating a favorable consistency and room for policy. With recent data showing EPS at 11.57 for 2023 and DPS at 2.7, it's evident DFS maintains a healthy coverage ratio. Overall, this trend is very positive, showcasing DFS's financial health and effective earnings deployment to fund dividends.

Dividends Well Covered by Cash Flow?

Examining how well dividends are covered by the company's free cash flow is critical because it gauges the sustainability of dividend payouts. Companies that generate ample cash flow relative to their dividend obligations are more likely to maintain or increase their dividends over time, offering consistent returns to investors.

The data suggests a somewhat inconsistent trend in how well Discover Financial Services (DFS) covers its dividend payouts with free cash flow. Initially, in the early 2000s, the dividend coverage was either zero or exceptionally low. For example, in 2008, the coverage was merely 0.03, and in 2009, it was 0.028. This could be attributed to lower free cash flow or higher payout amounts during those years. From 2010 onwards, the coverage ratio shows modest improvements but remains considerably low; for example, the peak coverage over this period was around 0.139 in 2015. While the trend from 2018 to 2023 remains just below or close to 0.1, this is still insufficient to deem dividends as well-covered. Thus, the trend is not favorable for this criterion, highlighting potential risks to dividend sustainability if cash flow does not markedly improve or if payout amounts are not sufficiently managed.

Stable Dividends Since the Company Began Paying Dividends?

Stable dividends mean consistent payouts without significant drops, giving income-seeking investors confidence in reliable returns.

Over the past 20 years, Discover Financial Services (DFS) has shown an upward trajectory in its dividend payments, starting from $0 in the early 2000s to $2.70 in 2023. This represents a significant increase over time. The only notable drop observed was between 2008 and 2009, when the dividend per share decreased from $0.24 to $0.08. However, this drop was less than 20% on an annualized basis and was part of the broader impact of the 2008 financial crisis. Other than this period, DFS has consistently increased its dividend payouts, confirming the stability of dividends. This trend is strongly positive for income-seeking investors as it reflects the company's commitment to returning value to its shareholders while maintaining financial health and operational strength.

Dividends Paid for Over 25 Years?

Highlight the importance of examining whether a financial services company has maintained dividends for over 25 years for dividend analysis.

The data provided shows that Discover Financial Services (DFS) started paying dividends in 2007. Therefore, they have not yet reached the benchmark of paying out dividends for over 25 years. It is important to consider this criterion because a long history of dividend payout is often indicative of a company's financial stability and commitment to returning value to shareholders. Companies that have consistently paid dividends for an extended period are generally seen as more reliable and lower-risk investments. Currently, DFS has a 17-year history of dividends, which is robust but falls short of the 25-year mark.

Reliable Stock Repurchases Over the Past 20 Years?

Interpreting the company's reliability in stock repurchasing over the past 20 years.

Discover Financial Services (DFS) has engaged in consistent stock repurchases, reflecting a significant reduction in the number of shares from 477.24 million in 2003 to 254.00 million in 2023. This indicates a sturdy average repurchase trend of approximately -2.95% annually. The consistency in buybacks throughout various economic cycles emphasizes their commitment to returning value to shareholders. However, there were certain years like 2006 and 2008 where shares increased, which could denote periods of strategic decisions deviating from their buyback policy. Overall, the trend is highly favorable as it showcases the company's long-term dedication to enhancing shareholder value.