Synchrony Continues To Move In The Right Direction


Note: Before I get into Synchrony, I wanted to make a quick comment about Brexit. This vote shocked the markets and has added instability into Europe. This was a non-binding referendum. The UK may or may not begin a 2-3 year process of renegotiating its treaties with the EU. I don’t think anyone knows what is going to happen. The tough thing about all of this is a minority of 37% of the population (52% of 72% voter turnout) have made a monumentally important decision on behalf of the majority. 

Trade between the UK and the US represents just 0.5% of US GDP. I don’t think this number will change much. Markets responded unfavorably after the vote primarily because of the ripple effects and future instability caused from it. I am not very worried about this vote as a U.S. investor. There is actually a possibility that investments will flow out of Europe and into U.S. equities which will help performance. The U.S. economy continues to grow at a moderate pace and is doing much better than Europe or Asia. I believe most of the worry is overblown and our markets will calm down in the coming weeks. As a long term value investor, this event won’t cause me to change my portfolio. However, it will give the gloom and doom crowd a chance to scare people for a while. I don’t really see a reason to be scared as interest rate hike expectations have now been pushed out into 2018.

Synchrony Financial is the largest provider of private label credit cards in the United States based on purchase volume and receivables. The company provides a range of credit products through programs it has established with a group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers. The company’s revenue activities are managed through three sales platforms: Retail Card, Payment Solutions and CareCredit. It offers its credit products through its subsidiary, Synchrony Bank. Through the Bank, it offers a range of deposit products insured by the Federal Deposit Insurance Corporation (FDIC), including certificates of deposit, individual retirement accounts (IRAs), money market accounts and savings accounts. The Company offers three types of credit products: credit cards, commercial credit products and consumer installment loans. It offers two types of credit cards: private label credit cards and Dual Cards. Synchrony’s active accounts represent a geographically diverse group of both consumers and businesses, with an average FICO score of 715 for consumer active accounts at December 31, 2015.

Operating Segments


Retail Card

Retail Card’s platform revenue consists primarily of interest and fees on loan receivables. The company has Retail Card programs with 22 national and regional retailers, which have approximately 40,000 retail locations and include department stores, specialty retailers, mass merchandisers, e-retailers (multi-channel and online retailers) and oil and gas retailers. Synchrony is known for developing deep relationships with their partners. The average length of relationship with ongoing Retail Card partners is 17 years. Below is a screenshot of some of their major partner relationships.


90% of their contractual relationships will expire in 2019 or beyond which should add stability to revenues. They have a strong portfolio of partnerships. I can’t help but wonder if they were close to getting the Costco deal. Today is actually the last day my Costco AmEx will work. Tomorrow everyone will switch to the Citi cards. Anyway, SYF’s five largest partners are Gap, JCPenney, Lowe’s, Sam’s Club and Walmart. These five accounted for 49% of total revenue for the year ended December 31, 2015 and 51% of loan receivables at December 31, 2015.

Payment Solutions

Synchrony offers promotional financing in a variety of ways, deferred interest (interest accrues during a promotional period and becomes payable if the full purchase amount is not paid off during the promotional period), no interest (no interest on a promotional purchase) and reduced interest (interest is assessed monthly at a promotional interest rate during the promotional period). During the promotional period SYF does not generate much if any interest income. However, promotional financing can boost the loan receivable balance and they will generate fee income on late fees on required minimum payments. This segment accounted for 15% of total revenues in 2015. Synchrony uses promotional financing for big-ticket items where financing could help customers make a purchase.


CareCredit is similar to the Payment Solutions segment except it is exclusively for healthcare procedures, products and services. This service is utilized in the dental, veterinary, cosmetic, vision, and audiology fields. About 63% of the revenue from this segment comes from the dental industry. This is partially due to SYF’s partnership with the American Dental Association.

Economic Drivers

Synchrony is affected by the general economic conditions in the U.S. In the event that the economy worsens, their delinquency rate would rise. In December 2009, the company’s charge-off rate was 11.26% compared to 4.33% as of December 31, 2015. General economic conditions in the U.S have shown signs of improvement. However, growth has been slow throughout the economic recovery. As shown by the screenshots below, consumer spending has continued to grow and people are continuing to consume more goods.

Retail sales

Personal consumption expenditures

In the first part of 2016, we saw many economists begin to call for a recession as several economic indicators flashed warning signs. The ISM and PMI indicators worried many. Since then, the price of West Texas Intermediate (WTI) has rebounded and so have the economic indicators that were flashing warning signs. Q1 GDP was a lackluster 0.5%. However, Q2 is expected to be much better as the economy has rebounded. The most recent GDP estimate is for the economy to grow 2.8% in Q2. This is being driven by increased consumer spending. See screenshot below:


The economy continues to grow at a slow pace. Interest rates remain low which helps boost investment from companies. As the price of WTI continues to find equilibrium, I expect the economy to continue to grow at a moderate pace as interest rates slowly rise. For SYF, this means that consumers will continue to spend and their net charge-off rate should remain low.

Asset Quality

Synchrony’s overall credit performance has drastically improved throughout the economic recovery.charge-offs

The charge-off ratio has drifted lower each year. 2016 could be a different story though. In Q1 the charge-off ratio actually increased to 4.7% from 4.53% as of December 31, 2015. On June 14th the company disclosed that they are forecasting the charge-off rate to rise another 20-30 basis points over the next twelve months. They added that they will be increasing their allowance for loan losses balance in anticipation of this deterioration of credit. The stock got crushed on this news because it completely contradicted the tone portrayed during the Q1 conference call. This news is quite confusing considering they expect the consumer to increase spending over this time period. So is their credit quality really as good as they say it is? Company expectations are for the charge-off ratio to rise from 4.53% as of December 31, 2015 to possibly 5% at the end of 2016. A move like this should not happen unless economic conditions deteriorate. This move could be the result of excessively easy credit standards. The alternative theory is that management wanted to lower the expectations for the company over the next year.

Synchrony speaks to its asset quality very often. It is always a point of improvement for the company. As of Q1, 28% of their portfolio was made up of sub 660 FICO scores. See screenshot below.


Sub 660 FICO’s are not a problem. These individuals need credit cards too. The problem becomes when they become delinquent and lenders realize their risk model did not work properly. When lenders do not charge enough interest for the risk they are taking it becomes bad for investors. Synchrony warned that this could be the case when they announced last week they would be adding the their allowance for loan losses balance. This is the bank’s safety net for when people default on loans. The stock fell 12% on the day they made the announcement and has fallen an additional 7% since then. This might be an opportunity for investors. Even if charge-offs increase over the next year, this will be partially offset by the amount of retail share agreement payments that SYF pays to its partners. If net charge-offs increase, profitability of the card program will decline, and thus the retailer share agreement payment will also decline. There is a natural hedge built into these agreements where SYF will pay out lower amounts if profits fall. This is only if charge-offs actually increase.

Competitive Advantages

Synchrony is able to have long lasting partnerships with great companies because of their value proposition. Retailers that have a partnership with Synchrony do not have to pay interchange and exchange fees for in-store purchases as a result of their closed loop network. Customers find value using Synchrony from the purchase discounts offered by the retailers. These purchase discounts incentivize larger purchases and customer loyalty for the retailer and SYF.

When partners sign with Synchrony, they usually develop long lasting relationships. There are two primary reasons the average partner relationship is 17 years. First, the costs of switching are very high. The closed loop model Synchrony uses is unique and switching to a model that potentially has a different, bank, network, and issuer is a real headache. Secondly, Synchrony signs retail share arrangements that pay retailers once the economic performance of the program exceeds a contractually defined threshold. These retail share arrangements incentivize their partners to continue to grow sales on Synchrony’s platform.


SYF’s management has done a tremendous job transitioning away from GE Captial. They have added several new retail partners during their transition period. Additionally they have continued to manage credit quality in a slow growth environment. Management is now focused on growing the digital part of the company and thinking about the future of payment platforms.



Synchrony’s valuation metrics appear to be very reasonable. Today they do not pay a dividend or execute any buybacks. Synchrony will try to obtain approval from the Federal Reserve Board in 2016 for a dividend and/or a buyback. I expect them to begin paying a dividend in the next twelve months which could be a catalyst for the stock. The margins of the company are very strong. With 90% of their partnership contracts extending to 2019 or beyond, revenues should be fairly stable.

Balance Sheet Leverage

A common phenomenon with these types of businesses is leveraged balance sheets. Synchrony has one of the better balance sheets among its direct competitors. Discover Financial for example, is much more leveraged with a debt/equity ratio of about 2.2x. This makes SFY’s 1.6x look better. However, 1.6x is an uncomfortable amount of leverage. When looking at other competitors like Visa and MasterCard, they sell at nearly 3x the valuation of SYF. This large variance is the result of wider profit margins and less balance sheet leverage. Both trade with debt/equity ratios of about 0.5x. During Q1, Synchrony paid down a significant amount of long-term debt. This lowered their debt/equity ratio from 2x to 1.6x. Continuing to dig themselves out of debt in the next couple of quarters should have a material impact on the valuation the market places on the stock. With a debt/equity ratio closer to 1, this would be a terrific business. Prior to declaring a dividend, I hope they use their free cash flow to pay down their debt.

Analyst Estimates

If analyst estimates are correct, SYF is cheap. Analysts expect the company to make $3 per share in 2017. This means the stock trades at 8.5x forward earnings. This is less than half of the 18x forward earnings estimate of the S&P 500. The company is expected to grow at a 6% annualized rate over the next several years.


Synchrony is a solid business with competitive advantages. They have a terrific portfolio of retail partners and continue to add to it. Management has done a good job since the IPO of running the business while transitioning away from GE Capital. I really hope they have been paying down more debt in Q2. They will be trying to get approval from the Federal Reserve Board this year for a dividend and/or a buyback. Improving the balance sheet before asking for approval would make sense and they have plenty of cash flow. I currently do not have a position but will look to take one this week as the stock is close to its 52 week low.



No Position





2 thoughts on “Synchrony Continues To Move In The Right Direction”

  1. You cannot compare Synchrony to Visa & MasterCard – that’s apples and oranges because V & MA are not issuers and do not carry receivables. In addition to Discover, Amex, Capital One & Alliance Data and big bank credit card issuers are competitors

    Visa & MA are not so much and Synchrony dual-cards (or co-brand) are actually Visa & MA

    Otherwise very well thought out

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