Synchrony Financial Still Looks Like a Solid Value Play (NYSE:SYF)

In 2016, I wrote an article about Synchrony Financial (NYSE:SYF) in which we praised the company as a flight to safety in times of economic uncertainty and talked about the possibility that the company might start paying a decent dividend with its nice earnings.

That was a long time ago, but Synchrony Financial has done extraordinarily well in the years since, making it a great time for consumer lending companies, and indeed the company has used some of that good fortune to start pay dividends.

The company has doubled since then and I thought this would be a good time to look at Synchrony Financial again to ask if 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

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(Source: most recent 10-Q from the SEC)

Synchrony Financial has grown quite a bit over the past eight years and is no longer so undervalued by the broader market. The company still has a solid loan-to-deposit ratio and assets that easily cover its liabilities.

The company is currently trading at a price-to-book ratio of 1.20. That’s not bad at all for such a profitable company and is almost exactly in line with the sector median.

risks

Synchrony Financial needs to retail existing partners and attract new ones. This is important for a company whose cards are tied to various retailers, and Synchrony has a pretty good reputation for providing a solid return to its customers.

Also, the business these customers enjoy is important. For example, Synchrony offers a JC Penney credit card, and business should do pretty well if JC Penney is popular. If they struggle, the credit card seems less relevant.

The reality is, however, that competition in consumer finance 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 case for its customers to use its cards over the alternatives.

Unlike many global credit card companies, Synchrony Financial’s business is heavily focused on US consumer credit. That means the US credit market is inexorably tied to the company’s success. If the economy worsens or people take out fewer consumer loans, the business will certainly suffer.

Interest rates have been high lately and very favorable for credit card companies. Interest rate is expected to come down somewhat soon enough and this could hurt the bottom line.

Finally, the company must manage its credit risks going forward to ensure that it does not offer credit cards to people who are too risky. Sync cards are generally easier to get than cards from many of the big credit card companies, and that necessarily means some of their customers aren’t the best with their credit ratings.

Statement of Operations – A growing business

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(source: most recent 10-K and 10-Q from the SEC)

As mentioned before, this has been a great environment for credit card companies, and Synchrony Financial has taken advantage of this time with growing revenues. Earnings have dipped a bit in recent years, but look set to return to positive territory according to estimates.

Those estimates are that Synchrony Financial will earn $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 slightly better than the sector median, which puts it nicely within a value range.

Cash flow and dividends

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(source: most recent 10-K and 10-Q from the SEC)

As you can see, Synchrony Financial has generated a lot of free cash flow from operations and is using some of it. The overall financial position of the company is quite strong and looks set to improve in the coming years.

Synchrony Financial has paid a modest dividend in recent years, 25¢ per quarter. That’s a 2.1% yield, which isn’t bad. The company has the ability to increase that dividend in the years to come, as they only pay out about $400 million in dividends on common stock right now. It would be easy to imagine them being able to support even double that rate, which would make this an interesting dividend stock.

Even if they don’t do so immediately, the company’s strong cash position will allow them plenty of flexibility to grow in the future and potentially return value either through dividends or share buybacks.

Conclusion

Obviously, 2016 would have been a great time to get into Synchrony Financial. But that doesn’t mean the company isn’t still doing pretty well right now, and I’d suggest there’s still room for the price to rise from here. I will rate this as a buy.

For investors, I would keep an eye on the company’s cash position, as that is their strongest feature at the moment, and also how they are doing in maintaining business contracts with various retailers.

A drop in interest rates could take some of the boom out of the consumer credit market, but Synchrony Financial is still a strong player in a very good position for the future. Hopefully they will find a way to return more value to shareholders in the form of higher dividends in the years to come.