Senior Vice President Christopher Montoya of First Financial Trust says Discover Financial Services (DFS) is a financial stock that will benefit from higher interest rates, while also having the potential to raise its dividend.
On Discover Financial, they are very cheap, like J.P. Morgan. They are at 9.77 times 2016 earnings estimates. The dividend yield here is 2%. We think they have the ability to grow it much more. And like J.P. Morgan, they will also be helped by the higher interest rates.
In 2016, we actually forecast there will be earnings-per-share growth and p/e multiple expansion as they grow their loans, they improve their internal efficiencies, and we see growth in their non-credit-card products.
Discover has seen its earnings impacted by increased marketing expenses, Montoya says, but the company is now seeing signs of the marketing push helping its business.
Consumers are liking the new features with their Discover it program, such as double cash back, the Freeze It feature on the smartphone, the ability to use Discover products on Apple and Android Pay, and the program seems to be really catching hold with Millennials, which is an up-and-coming demographic that we think is very important for Discover’s long-term growth profile.
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