What is DFS's Intrinsic value?

Discover Financial Services (DFS) Intrinsic Value Analysis

Executive Summary

As of May 23, 2025, Discover Financial Services's estimated intrinsic value ranges from $262.68 to $307.91 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Dividend Discount Model (Multi-Stage) $262.68 +31.3%
Dividend Discount Model (Stable) $307.91 +53.9%

Is Discover Financial Services (DFS) undervalued or overvalued?

With the current market price at $200.05, the stock appears to be significantly undervalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate Discover Financial Services's intrinsic value, including:

  1. Dividend Discount Model (DDM): Values the company based on expected future dividend payments

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.9% 4.4%
Equity market risk premium 4.6% 5.6%
Adjusted beta 0.79 0.98
Cost of equity 7.5% 10.3%
Cost of debt 5.0% 5.0%
Tax rate 23.0% 23.3%
Debt/Equity ratio 0.31 0.31
After-tax WACC 6.6% 8.8%

Valuation Methods

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 13.7%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 8.9%
  • Long-term growth rate: 2.0%
  • Fair value: $262.68 (31.3% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 10.3% (Low) to 7.5% (High)
  • Long-term growth rate: 1.0% (Low) to 3.0% (High)
  • Fair value range: $168 to $448
  • Selected fair value: $307.91 (53.9% from current price)

Key Financial Metrics

Metric Value
Market Capitalization $50335M
Enterprise Value $64350M
Trailing P/E 8.93
Forward P/E 10.19
Trailing EV/EBITDA 0.00
Current Dividend Yield 153.18%
Dividend Growth Rate (5Y) 7.56%
Debt-to-Equity Ratio 0.31

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Dividend Discount Model (Multi-Stage) 57% $52.54
Dividend Discount Model (Stable) 43% $46.19
Weighted Average 100% $282.07

Investment Conclusion

Based on our comprehensive valuation analysis, Discover Financial Services's weighted average intrinsic value is $282.07, which is approximately 41.0% above the current market price of $200.05.

Key investment considerations:

  • Historical dividend growth of 7.56%

Given these factors, we believe Discover Financial Services is currently significantly undervalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.