Discover falls after profit decline, dividend cut
Discover Financial Services, the Riverwoods-based credit-card company, fell in New York trading after posting a profit decline and saying it would cut the dividend to 2 cents a share.
Discover's fiscal first-quarter earnings from continuing operations fell 50 percent to $120 million, or 25 cents a share, from $239 million, or 50 cents a share a year earlier, the company said in a statement today. The company's first-quarter net income, which includes a gain tied to an antitrust case, was 25 cents a share, up from 17 cents the same period a year earlier. Analysts estimated a loss of 16 cents a share.
The credit-card company earlier this month won a $1.2 billion investment from the U.S. Treasury's Troubled Asset Relief Program to improve liquidity. Discover followed rival credit-card lender American Express Co. in becoming a bank to gain access to government rescue funds, and is relying on federal cash and bank deposits after the market for selling bonds backed by credit-card payments froze last year.
"Given the unprecedented economic downturn, we continue to take steps to strengthen our balance sheet, including increasing our reserves," said Chief Executive Officer David Nelms in the statement, and added later in a conference call the company wanted to repay its government capital as soon as possible.
The "modest" capital savings of $80 million a year the 67 percent payout cut will yield will help the credit-card company maintain its capital position, Nelms said in the call.
Discover dropped 96 cents, or 13 percent, to $6.28 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has fallen 59 percent in the past 12 months.
Loss Provisions
Credit-card lender losses are rising as unemployment pushes more people to fall behind on their debt. The U.S. lost almost 2.6 million jobs in 2008 and the unemployment rate jumped to 8.1 percent in February, the highest level in more than a quarter century.
The company tripled its provision for loan losses, to $937.8 million from $305.6 million the same period a year earlier. The 30-day delinquency rate rose to 5.04 percent, from 3.63 percent a year earlier.
The company in October agreed to accept $2.75 billion to resolve an antitrust case it brought against rivals Visa Inc. and MasterCard Inc., the world's largest credit-card networks. Discover runs the fourth-largest credit-card network and also lends money unlike Visa and MasterCard, which handle transactions on behalf of banks. First-quarter net income included a $297 million after-tax gain tied to the case, Discover said.
"The largest single driver of earnings for the quarter is the reserve requirement," said John Stilmar, an analyst with SunTrust Robinson Humphrey in a note to investors March 17. Stilmar rates Discover shares as "neutral."