Synchrony Financial (SYF -0.60%) will probably soon raise its dividend for the first time. The company recently announced plans to bump its quarterly distribution by $0.02, a 15% increase, to $0.15 per share. The raise would take place in Q3 of this year. The specialty financier's board also approved a new stock-repurchase program of up to $1.64 billion.
The news comes shortly after Synchrony Financial reported a Q1 that saw net profit crater by 14% on a year-over-year basis, coming in well under analyst estimates. So perhaps it's not the best time for the company to beef up its dividend and launch a new round of share buybacks. Or is that concern overblown? Let's take a closer look.
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Card issuer to the stars
Although Synchrony Financial is in the credit card business, it's not a household name like card giants Visa (NYSE: V), MasterCard (NYSE: MA), or American Express (NYSE: AXP). That's because it doesn't operate a proprietary brand, in contrast with those famous companies. Instead, Synchrony Financial specializes in issuing private-label products, which for the most part comprise branded store cards. The company issues plastic for some of the top retail brands in the U.S., including Gap and Wal-Mart.
The private-label card space is a much different animal from the traditional credit card segment. Visa, MasterCard, and -- to a lesser extent -- American Express are mass-market, general card brands. All three have distinct advantages the scrappier Synchrony Financial lacks -- Visa and MasterCard are basically middlemen, since they function as network and brand operators, while issuer and network/brand operator American Express has a degree of snob appeal and as such can be selective about its "members," cherry-picking the ones more likely to pay their bills on time.
Like American Express, Synchrony Financial acts as an issuer for its cardholders. Unlike the don't-leave-home-without-it company, though, it can't be as selective about its customers. After all, the Gaps and the Wal-Marts like to push card ownership to bind customers to their brands, and to keep them coming into their stores. As a result, the creditworthiness of Synchrony Financial's lender base is relatively low. Almost 30% of its credit card holders have FICO scores at or under 660, a level many traditional lenders consider subprime.
Consequently, the company's net charge-off rate is relatively high. It exceeds 5%, well above the latest 2.3% quarterly average of the 100 largest U.S. banks, and far chunkier than the 1.8% for the famously lean American Express.
Yet Synchrony Financial still performs well in spite of those challenges. In Q1, it managed to boost its net interest income by 12%, to $3.6 billion, while purchase volume in its core retail card operations rose by nearly 7%, to almost $23 billion. And although revenue and net profit were both down during the quarter, the company is still making good coin. It's comfortably in the black, with a net margin of 12%. That's not far away from AmEx's 15% in its most recently reported frame.
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Other key line items heading north for Synchrony Financial are -- crucially for shareholder payouts -- operating and free cash flow. The company has done a fine job lifting both recently, to the point where the latter exceeded $7 billion on a trailing-12-month basis.
SYF Free Cash Flow (TTM) data by YCharts
That's a pittance compared with what it's spent on dividend payouts and buybacks. Combined, these totaled around $690 million in fiscal 2016. So even if the company blows most of the authorized amount of stock repurchases this year, it can easily afford the spending, on top of the 15% expansion in the dividend.
So in the end, I don't think Synchrony Financial is wrong at all to boost its payout and launch a new round of share buybacks. It can well afford these measures, and they'll give shareholders two encouraging reasons to hold on to their stock.
