3 days Ago
J. Michael Jones Back in 2016, I wrote an article about Synchrony Financial ( NYSE: SYF ) in which I praised the company as a flight to safety in times of economic uncertainty, and talked about the possibility that the company could start paying a decent dividend with its nice earnings. That was a long time ago, but Synchrony Financial did tremendously well in the ensuing years, with this being an excellent time for consumer lending companies and indeed, the company did use some of that good fortune to start paying dividends.
The company has more than doubled from then until now, and I thought this would be a good time to look at Synchrony Financial again, to ask whether it is still worth considering as a value investment option, and how the company is returning value to shareholders. Consolidated Balance Sheet – Then and Now Then Now Total Loans $62.2 billion $91.
3 billion Total Deposits $45.0 billion $83.1 billion Liabilities $68.
4 billion $104.9 billion Assets $81.6 billion $120.
5 billion Shareholder Equity $13.2 billion $15.5 billion Assets / Equity 6.
18 7.77 Loans / Deposits 138% 110% Click to enlarge (Source: most recent 10-Q from SEC) Synchrony Financial has grown quite a bit in the last eight years, and is no longer quite so underappreciated by the market at large. The company still sports a solid Loans/Deposit ratio and assets that easily cover their liabilities.
The company is presently trading at a price/book ratio of 1.20. That’s not bad at all for a company this profitable, and is almost exactly in line with the sector median.
The Risks Synchrony Financial needs to retail existing partners and attract new ones. That’s important for a company whose cards are linked to various retailers, and Synchrony has a pretty good reputation of offering a solid return to its clients. The business enjoyed by those clients is important too.
For instance, Synchrony offers a J.C. Penney credit card, and that business should do quite well if J.
C. Penney is popular. If they are struggling, the credit card seems less relevant.
The reality though is consumer finance competition is very intense. There are a lot of cards out there, and a lot of card providers, and Synchrony Financial needs to make a compelling offer to its customers to use their cards over alternatives. Unlike a lot of the global credit card companies, Synchrony Financial’s business is heavily concentrated on US consumer credit.
That means that the US credit market is tied inexorably to the company’s success. If the economy turns sour or people are taking fewer consumer loans, the business will surely suffer. The interest rates has been high of late, and very favorable for credit card companies.
It is widely expected that the interest rate will drop somewhat fairly soon, and that might do some harm to the bottom line. Finally, the company needs to manage its credit risks going forward, to make sure they aren’t offering credit cards to people who are too risky. Synchrony cards are generally easier to get than a lot of major credit card companies’ cards, and that necessarily means some of their customers aren’t the best with their credit ratings.
Statement of Operations – A Growing Business 2021 2022 2023 2024 (1H) Total Int. Income $15 billion $17 billion $21 billion $11 billion Net Int. Income $9 billion $8 billion $7.
4 billion $3.7 billion Net Earnings $4.2 billion $3.
0 billion $2.2 billion $1.9 billion Diluted EPS $7.
34 $6.15 $5.19 $4.
70 Click to enlarge (source: most recent 10-K and 10-Q from SEC) As mentioned before, this has been a great environment for credit card companies, and Synchrony Financial has taken advantage of that time with growing revenue. Earnings have been down a bit in recent years, but look to be turning back to the positive sign according to estimates . Those estimates are that Synchrony Financial will be earning $5.
84 this year, giving us a P/E ratio of 7.94, and will earn $5.89 next year, improving a forward P/E to 7.
88. In both cases, this is quite a bit better than the sector median , which puts this nicely in a value range. Cash Flow and Dividends 2021 2022 2023 2024 (1H) Operating FCF $7.
1 billion $6.7 billion $8.6 billion $4.
7 billion Investing FCF ($4.8 billion) ($10.2 billion) ($14.
2 billion) ($1.7 billion) Financing FCF ($5.2 billion) $5.
3 billion $9.6 billion $1.2 billion Click to enlarge (source: most recent 10-K and 10-Q from SEC) As you can see, Synchrony Financial has been generating a lot of free cash flow through operations, and is putting some of it to good use.
The company’s overall financial position is quite strong, and looks only to be improving in the years to come. Synchrony Financial has been paying a modest dividend in recent years, 25¢ per quarter. That’s a yield of 2.
1%, which isn’t bad. The company has a capacity to increase that dividend in the years to come, as they are only paying around $400 million in common stock dividend right now. It would be easy to imagine them being able to sustain even double that rate, which would turn this into an interesting dividend stock.
Even if they don’t immediately do that, the company’s strong cash position will allow them a lot of flexibility to grow in the future, and to potentially return value either through dividends or stock buybacks. Conclusion Data by YCharts Obviously, 2016 would’ve been a great time to get in to Synchrony Financial. But that’s not to say that the company isn’t still doing quite well now, and I would suggest that there is still room for the price to go up from here.
I’m going to rate this a buy. For investors, I would keep an eye on the company’s cash position, as that is their strongest feature right now, and also how they are handling maintaining their business contracts with various retailers. A decline in interest rates might remove some of the bloom from the consumer credit market, but Synchrony Financial is still a strong player in a very good position for the future.
Here’s hoping they find a way to return more value to shareholders in the form of higher dividends in the years to come. Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results.
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