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Sometimes, playing the number-four role isn't a bad gig. Just ask
Discover Financial Services(DFS), the fourth-largest payment card network in the country -- and the second-largest closed-loop network after
American Express(AXP - Get Report). Unlike higher-profile peers, Discover issues its own Discover and Diner's Club cards to consumers (as well as licensing its network to other issuers). While that business adds credit risk to DFS' balance sheet, it also adds to the firm's margins.
Discover's closed-loop status provides the firm with considerable cost control over its network. As a result, Discover enjoys a special relationship with
Wal-Mart(WMT - Get Report), whose Sam's Club stores issue their own Discover-branded cards. Because the firm is still relatively small from a valuation standpoint, it could make an attractive acquisition target for a larger financial institution that's looking to gain advantages in the payment network space. While that's speculative at best, a high replacement value for DFS' brand makes it more attractive from a shareholder standpoint.
This month, Discover hiked its dividend to 10 cents per quarter, a 67% increase. That move ratchets the firm's yield to 1.66%.
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-- Written by Jonas Elmerraji in Baltimore.