Warren Buffett (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) are each a legend in their own right, although they achieved that status through approaches with distinctively different characteristics. Buffett famously seeks quality businesses at fair prices, forsaking mediocre businesses at low prices years ago. Klarman has never given up his deep value style of investing, often seeking “cigar butts,” or companies that may be on their last leg but could pull through. Perhaps consequently, their portfolios overlap on only one company: Synchrony Financial (SYF, Financial).
Klarman’s Baupost Group established its stake in the private-label credit cards company in the third quarter of 2016, lugging in 17.57 million shares when the price averaged $27. Buffett followed in the second quarter with 17.46 million shares in the second quarter of 2017 at a price around $30. That also happened to be the same quarter Klarman significantly expanded his holding, amassing another 11.63 million shares – his last recorded buy.
Seth Klarman's buys:
As of March 31, the most current data available, Klarman owns 29.30 million shares, reflecting 9.55% of his equity portfolio and 3.88% of its shares outstanding. Buffett owned 20.80 million after a 19.13% increase in the second quarter. His stake represented 0.37% of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial)’s portfolio and 2.76% of the company.
There is a chance Ted Weschler or Todd Combs, Buffett's deputy portfolio managers, may have purchased the stock on behalf of Berkshire Hathaway, though Synchrony's CEO has indicated that she received Buffett's backing.Â
Warren Buffett's buys:
Spun off from General Electric (GE, Financial), Synchrony Financial shares have gained 51% since they began trading in 2014. After falling 10% year to date, the stock traded around $38.86 Tuesday.
Synchrony makes credit cards for retailers and health care providers, allowing consumers to pay off purchases over time. In the first quarter, it financed $29.6 billion for 71.3 million customers, and had $77.9 billion in loan receivables.
The company has only one segment and it operates almost exclusively in the U.S. Some of its business partners include Lowe’s (LOW, Financial), GAP (GPS, Financial) and Amazon (AMZN, Financial). It has three sales platforms: retail cards, which offers private label credit cards; payment solutions, for financing large purchases; and CareCredit, for health care procedures.
Klarman and Buffett are likely both drawn to the company’s glowing financials. Synchrony has been highly profitable, generating more than $1 billion in net income annually since 2011. Free cash flow has also flown steadily above $5 billion over the same period, growing annually since 2014 to reach $8.92 billion in 2017. Revenue has increased each year since 2013, touching $12.37 billion in 2017.
Synchrony’s balance sheet showed $13.04 billion in cash and $21.03 billion in long-term debt at year-end 2017.
Its price-earnings ratio stands at 13.28, higher than 53% of the companies in its industry. Its price-book ratio at 1.85 is higher than 68% of similar companies.Â
The growth continued in the first quarter. Net earnings soared 28.3% year-over-year to $640 million, buoyed by higher net interest income and decreased provision for income taxes. Net interest income increased 7% to $3.8 billion, primarily due to loan growth. Loan receivables rose 6.1% to $77.85 billion on higher purchase volume and more customer account additions.
Synchrony also expanded its partnerships with companies, connecting with Crate and Barrel, jtv and Mahindra. Its CareCredit network grew with additions of American Veterinary Medical Association, American Med Spa Association and Spa Industry Association.
In terms of returning cash to shareholders, Synchrony boosted its dividend to 15 cents from 13 cents a year earlier and repurchased $410 million of its common stock. It offers a 1.72% forward dividend yield, which is close to a two-year high.
Weakness occurred in at least one area, as loans 30 days past due increased to 4.52% from 4.25% a year earlier. Net charge-offs as a percentage of total average loan receivables also increased 6.14% from 5.33%. Though a concerning increase, the company is adding higher-quality consumers. The average FICO score topped 660 for 72% of its loan holders.
Perhaps the company's biggest development this year was the purchase of PayPal’s consumer credit portfolio for $7 billion last week, after announcing the agreement in November 2017. In the deal, Synchrony acquired $7.6 billion in receivables, which encompasses PayPal's $6.8 billion U.S. consumer credit portfolio and $0.8 billion in participation interests of unaffiliated third parties.
PayPal and Synchrony will continue their co-brand consumer credit card program agreement, and Synchrony became the exclusive issuer of the PayPal Credit online consumer financing program through 2028.
PayPal and Synchrony have partners on PayPal-branded consumer credit cards since 2004. The company will discuss the financial impact of the transaction in its second quarter earnings call.
“This collaboration plays to both companies’ strengths in providing seamless digital payments and innovating for partners, merchants, and consumers. It also expands Synchrony’s leadership in consumer credit programs,” said Margaret Keane, president and CEO of Synchrony.
Going forward, Synchrony may enjoy an environment conducive to growth, with cashless payments rising 11.2% from 2014 to 2015, the fastest growth of the past decade, according to a study by CapGemini and BNP Paribas released in 2017. Debit cards accounted for 46.7% of non-cash payments, as credit cards followed at 19.5%.
While Synchrony is Klarman’s only financial services holding, Buffett displays strong conviction on the sector. He has 40.9% of his portfolio in the space, including stakes in each of the leading credit card companies: American Express, MasterCard (MA, Financial) and Visa (V, Financial).
