Warren Buffett's Berkshire Validates Another Credit-Card Company
16 August 2017 - 7:12AM
Dow Jones News
By AnnaMaria Andriotis
Warren Buffett's Berkshire Hathaway Inc. is increasingly betting
on the growing credit-card industry.
On Monday, Berkshire Hathaway disclosed it bought nearly 17.5
million shares of Synchrony Financial in the second quarter
totaling nearly $521 million. That is a vote of confidence for the
largest U.S. store credit-card issuer, whose shares rose more than
4% on Tuesday.
Berkshire Hathaway already owns $12.8 billion in American
Express Co.'s shares and smaller stakes in Visa Inc. and Mastercard
Inc. While Synchrony's cards are mostly geared at the mass market
with its cardholders comprising shoppers at stores ranging from
Wal-Mart Stores Inc. to Dick's Sporting Goods Inc., American
Express is more geared at affluent consumers. Coupled together, the
holdings increase Berkshire Hathaway's exposure to credit cards, an
industry where overall outstanding balances in June were up about
6% from a year ago, according to the latest data from the Federal
Reserve.
Bill Smead, chief executive of Smead Capital Management Inc.,
said that Synchrony's relatively cheap stock price likely played a
role in the purchase. Synchrony's shares fell in late April after
the company increased its outlook for full year 2017 charge-offs.
Since the beginning of the year, Synchrony shares are down 14.8%
compared with a 10% increase in the S&P 500.
Most of Synchrony's loan volume is tied to store credit cards
that it issues. Those include a mix of cards that can be used only
in the store that they are issued for and co-branded cards that can
be used anywhere. Synchrony's net charge-off rate, which reflects
the dollar amount of balances it wrote off as a loss compared with
its total average loan balances, increased by more than 0.90 of a
percentage point from a year prior to 5.42% in the second quarter.
The company also continues to set aside more money to cover for
future losses, with provisions rising 30% in the second quarter
from a year prior.
Synchrony's high interest rates, which run up to the high
20%-range for many Synchrony cards, can offset some concern.
Berkshire "must like the way their spread is set up despite the
fact that there are defaults," said Mr. Smead, whose firm is a
Berkshire shareholder.
A representative for Berkshire Hathaway didn't have an immediate
comment. A spokesman for Synchrony declined to comment.
The purchase of Synchrony was further notable in that it came at
the same time that Berkshire sold its holdings of General Electric
Co., unloading nearly 10.6 million shares. Synchrony Financial spun
out of General Electric in 2015.
Paul Lountzis, president of Lountzis Asset Management LLC, a
Berkshire Hathaway shareholder, said Synchrony is well capitalized.
Its board recently approved a share repurchase program of $1.64
billion for the four quarters through June 2018, above the
consensus estimates that averaged around $1.4 billion.
The store credit-card market is less competitive than the rest
of the credit- card industry, with less than a handful of very
large players. Synchrony accounts for about 38% of outstanding
store-card balances, according to trade publication the Nilson
Report. Its longstanding relationships with many merchants increase
the chances that Synchrony will remain a dominant player in a
market where retailers want to see that lenders have delivered on
driving more store sales and loyalty.
"It's always better to be an incumbent and have all those long
standing relationships going back many years," said Mr. Lountzis.
The firm "appeals to a different audience" than American
Express.
By comparison, American Express mostly lends to affluent
cardholders and its losses are among the lowest in the industry.
Its Chief Executive Kenneth Chenault at a conference in June said
that he had no desire to enter the store credit-card market,
referring to it as a "very cyclical, volatile business. When you
have good days, they can be really good, but those bad days are
really, really bad."
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com
(END) Dow Jones Newswires
August 15, 2017 16:57 ET (20:57 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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