Discover 4Q profit leaps 46 pct as card use rises

AP News
Posted: Dec 15, 2011 12:46 PM
Discover 4Q profit leaps 46 pct as card use rises

Shoppers spent more with Discover cards as the holiday shopping season began, helping lift the credit card company's fiscal fourth quarter profit 46 percent.

Discover Financial Services said Thursday that sales volume on its namesake cards rose 8 percent to $25.03 billion in the quarter. The total number of transactions Discover's networks processed rose 5 percent.

Discover executives said during a conference call to discuss the results that the increased use shows that its customers are reaching for their cards more often compared with other cards they carry _ Discover is becoming their "primary card." The trend is partially because more merchants accept Discover now, and also because consumers are seeking benefits like Discover's cash-back rewards when they make purchases.

Also helping boost results during the quarter was an improvement in customer payment habits. Rates of late payments and defaults fell.

Reflecting a broader trend across the credit card industry, the Riverwoods, Ill.-based company said the number of customers paying off their card balances each month increased.

Keefe, Bruyette and Woods analyst Sanjay Sakhrani noted that economic shakeout of the last few years has left credit cards in the hands of more affluent consumers who are better able to pay their bills in full each month, while those with lower credit scores and presumably less ability to pay are now less likely to use credit.

For the three months ended Nov. 30, Discover posted net income available to common shareholders of $508 million, or 95 cents per share, compared with $347 million, or 64 cents per share in the year-ago period.

A 3 percent decline in outstanding shares also helped boost per-share results.

Revenue rose 13 percent to $1.81 billion from $1.6 billion last year.

Analysts, on average, expected earnings of 89 cents per share on $1.81 billion in revenue, according to a survey by FactSet.

Growth in the company's private student loan and direct banking businesses provided added boosts during the quarter. During the period, Discover purchased an additional $2.4 billion in student loans, as total loans other than credit cards rose to $10.7 billion.

Analyst Chris Brendler of Stifel Nicolaus said called the results "impressive," and pointed to the growth in student loans and also private loans made by Discover Bank as positive. "It was a good quarter," he said.

For the full fiscal year, Discover reported net income of $2.2 billion, or $4.06 per share, up from $1.53 billion, or $2.84 per share, for the previous year.

Discover said the results enabled it to raise its dividend by 67 percent to 10 cents from 6 cents. The dividend is payable Jan. 19 to shareholders of record as of Dec. 29.

One issue that concerned investors was that Discover set aside $319 million to cover uncollected bills. That was down from $383 million a year ago, but up from just $100 million in the fiscal third quarter. The company attributed the move to economic uncertainty, despite the fact that defaults and late payments are near historic lows.

The move was a factor in a slide for the stock in midday trading, Discover shares fell 77 cents, or 3.2 percent, to $23.05. The stock has traded between $17.86 and $27.92 in the past 52 weeks, and closed Wednesday up about 30 percent since the start of the year.