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Why Should You Add Discover Financial (DFS) to Your Portfolio?

Discover Financial Services DFS is well-poised for growth on the back of healthy revenues and cost-cutting measures.

As a direct banking and payment services company in the United States, the company is steadily gaining from its digital shift, primarily led by the COVID-19 pandemic this year.

The company has witnessed its 2021 earnings estimate move 0.1% north over the past seven days.

Here we discuss the reasons for adding this currently Zacks Rank #1 (Strong Buy) company to your investment portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.

Discover Financial’s return-on-equity (ROE) reflects its growth potential. The company’s trailing 12-month ROE of 11% not only improved over the years but also compares favorably with the industry average of 5.6%.

The company’s organic growth contributed to its healthy revenue stream. This upside was mainly driven by higher net interest incomes and its other total income. Interest income of the company saw a CAGR of 8.1% from 2013 to 2019, which remains impressive to investors. Although the same suffered to some extent in the first nine months, we expect it to bounce back owing to a solid market position and expansion in the global payments business.

Recently, the company inked a deal with Lebanon-based areeba to jointly expand their global reach. With this agreement, Discover, Diners Club International, PULSE and Network Alliance cardholders are able to use their cards on the areeba network, which includes Point-of-Sale (POS) and e-commerce platforms across Lebanon.

The leading card issuer company took several initiatives to curb its costs amid the current turbulent environment. It is on track to achieve its previously announced cost savings. Some of these strategic actions are reducing its account acquisition costs, cutting down on brand awareness, lowering vendor and technology costs, etc. We expect this initiative to aid the company’s overall performance.

Discover Financial’s banking business provides significant diversification benefits. The business has been delivering strong results over the past many years. Within this business, the private student loan portfolio grew significantly, evident from its eight-year (2010-2019) CAGR of 28.6%.

Shares of the company have gained 76.2% in the past six months, outperforming its industry's growth of 49.4%.

Other companies in the same space, such as Global Payments Inc. GPN, Synchrony Financial SYF and Fiserv, Inc. FISV have also rallied 23.2%, 53.2% and 15.4% in the same time frame.

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Fiserv, Inc. (FISV): Free Stock Analysis Report
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Synchrony Financial (SYF): Free Stock Analysis Report
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