Synchrony Financial Stock: The Consumer Is Still Spending (NYSE:SYF)



Worries are always unfounded

It’s only been a quarter since I reviewed Synchrony Financial (NYSE: SYF) but it was difficult for the stock. It traded down 20% from $40 to around $32. The performance of the action is completely does not match the company’s performance, where purchase volume and loan balances have both grown faster than inflation over the past 4 quarters.

Growth in receivables from synchronized loans

Q2 2022 results slides (Financial Synchrony)

Synchrony added or renewed 25 map programs this quarter, more than making up for the loss of the BP (BP) and Gap (GPS) map programs.

When calling the results, management noted that the client was still spending. Their data shows that 2/3 of consumers still have some or all of their stimulus payments from last year remaining. Inflation forces consumers to shift their spending from discretionary to non-discretionary categories, but does not reduce overall spending. Credit quality remains good, with no increase in delinquencies and write-offs, although the company expects them to increase in the second half.

Synchronize credit trends

Q2 2022 results slides (Financial Synchrony)

If charges increase, Synchrony is partially covered by the terms of their retailer sharing agreements, which give less money back to card partners in this case.

Synchrony RSA and postings

Q2 2022 results slides (Financial Synchrony)

Although Synchrony expects charges to increase to around 3.5% of loans in the second half, the strong first half performance brings the average forecast for the full year down to 3.15%. The bank also guided the RSA forecast down the range to 5.25% of lending. Synchrony also maintains the line on expenses, with no upward revision of forecasts despite inflation.

Synchrony has been cautious with its dividend, increasing it by just $0.01 in the next quarter to $0.23, still representing a 2.9% yield thanks to the recent share price decline. . More impressive is their buyback program, where the bank has reduced the number of shares by 7.5% since the end of 2021. Synchrony still has $2.4 billion in authorized buybacks, which could reduce the number of additional 15% shares. I expect them to take about a year to complete this.

As you’ll see in the model below, Synchrony should be able to earn $5.85 per share this year, even with a slight increase in loan loss reserves to 11% of loans receivable. At $32, the stock has an incredibly low P/E of 5.5 times this year’s earnings. While earnings would decline in 2023 in the event of a recession, Synchrony remains well capitalized and able to weather a downturn with a Common Equity Tier 1 ratio of 15.2% and liquid assets of 20%, including unused credit facilities. The low multiple is still unwarranted, which leads me to give Synchrony stock a rare strong buy rating.

Financial model update

On the balance sheet, my main change in assumption from last quarter is that I am more cautious on loan loss reserves, raising the year-end forecast to 11% of receivables from 10.2% last quarter.

The stock is also cheap on a price/pound basis, although it was an even bigger bargain on 6/30/2021 when it traded at $27.62. This represented a P/B of just 1.06 based on actual 1H numbers. Year-end book value is estimated at $27.65/share, which would be a P/B of 1.16 based on a recent price of $32, which is still attractive.

Return on assets and return on common shares are still attractive at 3.0% and 22.5% by the end of 2022, but down from my last quarter estimate due to higher reserve build-up high. Excluding changes in reserves, ROA and ROCE would have improved compared to 2021 levels.

Synchronous balance sheet model

Author’s worksheet (Data source: company advice and author’s estimates)

On the income statement, I use the firm’s advice of 15.50% net interest margin on loan receivables mentioned above. This is the upper end of the previous orientation range. The bank also provided guidance on retail stock arrangement costs of 5.25% and write-offs of 3.15% as a percentage of loans. This is the bottom of the previous orientation. Operating expenses remain at $1.05 billion per quarter. Buybacks are as described above, resulting in an average share count of 471.6 million for 2022, lower than my last estimate because the bank can now buy back more shares for the same dollar amount. The resulting EPS of $5.85 is lower than 2021 and my last estimate due to the build-up of loan loss provisions this year compared to the large reserve releases last year.

Sync Earnings Model

Author’s worksheet (Data source: company advice and author’s estimates)

Good business across the capital structure

Synchrony also has a preferred issue (SYF.PA) with a coupon of 5.625% which is now trading at $19.59 for a current yield of 7.25%. The preference is redeemable as of 11/15/2024 at a face value of $25. While I don’t expect a call in the current interest rate environment, it could happen if rates go down. With $734 million outstanding, the preference represents only about 5% of total equity. In addition, preferred dividends represent only about 1.5% of the net profit expected this year. S&P’s BB- rating seems too low given this excellent coverage.

Synchrony also has a number of bonds available with maturity dates from March 2024 (YTM 4.5%) to October 2031 (YTM 6.2%). These bonds are rated BBB- by S&P and are a bargain now when the middle part of the yield curve is elevated.

List of synchronization links

Charles Schwab

Finally, Synchrony offers good savings account rates such as 2.65% for a 19 month CD and 1.4% for a high yield savings account. These can be opened online and it is easy to set up ACH transfers to other banks or brokers.


SYF’s share price is down about 20% since last quarter on worries about an upcoming recession impacting consumer spending. In the Q2 2022 earnings release, we see that the consumer is still paying their bills on time, even as they buy more and start carrying a higher balance. Organic growth in loans receivable, combined with new programs, more than offset the loss of interest income from the recently sold BP and Gap loan portfolios. Inflation is encouraging consumers to turn to non-discretionary purchases, but total spending remains high. Most consumers still have a cushion of savings from last year’s stimulus payments.

Growth in loans receivable is the primary driver of earnings, allowing Synchrony to continue to repurchase large amounts of stock, which contributes to EPS and book value per share. This is true even with a more conservative estimate of loan loss reserve build in the second half of 2022. The bank is expected to earn $5.85 per share this year, which puts the P/E at a ridiculously low 5 .5 times 2022 earnings. While earnings could fall in the event of a recession, the bank remains well capitalized with good liquidity to weather the storm. After rating SYF as a buy last quarter, nothing has changed in the company’s fundamentals. Only stock is 20% cheaper. This makes SYF a strong buy. If you’re still not sold on common stocks, there are other securities higher up in the capital structure that also offer attractive yields, including preferred stocks, bonds, CDs and savings accounts.


Comments are closed.