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Is Synchrony Financial a Buy?

The major credit card issuers -- those that loan the money for credit card purchases -- had a difficult year in 2020. The primary reasons were the pandemic and the resulting recession, which caused people to lose their jobs, businesses to shut down, and spending to slow dramatically. All of these things reduce the amount of money that people spend using credit cards.

But as tough as 2020 was, there is optimism for 2021. Spending gradually increased in the second half of last year, and with the COVID-19 vaccine supply growing quickly, there is great hope that life will return to some semblance of normalcy this summer. For credit card issuers like Synchrony Financial (NYSE: SYF), that's very good news. It's a stock you want to keep an eye on -- here's why.

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Image source: Getty Images.

House in order

Synchrony is the 10th-largest credit card issuer in the U.S., with a roughly 2% market share. But unlike other issuers, Synchrony primarily issues store credit cards, which offer their users rewards and benefits. Synchrony offers more than 100 of these store cards, including the Amazon.com Store Card, which can only be used for Amazon purchases, as well as cards from Lowe's, Banana Republic, Ashley Furniture, and Sam's Club, among others. Synchrony also offers about 30 store-branded cards that can be used on the broader Mastercard or Visa network. Among them are the Nissan Visa card and the PayPal Cashback Mastercard.

Synchrony saw earnings plummet to $286 million in the first quarter, down from $731 million in the fourth quarter of 2019. Then, earnings dropped to a low of $46 million in the second quarter before climbing back up to $313 million in the third quarter. But in the fourth quarter of 2020, earnings surged to $738 million -- which was actually up slightly from pre-pandemic levels.

While net interest income was down 9% year over year to $3.7 billion, purchase volume was essentially flat at $39.9 billion. Also, provision for credit losses was down 32% year over year to $750 million due to improving credit quality and lower net charge-offs, which decreased 43% from the fourth quarter of 2019. In addition, the company embarked on an expense reduction initiative throughout the pandemic that lowered expenses by 7% year over year to $1 billion.

The Venmo card is a huge growth opportunity

Synchrony added 25 new relationships in 2020, including two major deals that should drive growth in 2021 and beyond. One was with PayPal to launch the Venmo credit card, powered by Visa. Venmo is PayPalʻs hugely popular mobile app to send and receive money. The Venmo credit card, which can be used virtually, provides Venmo users with cash back on purchases and comes with a QR code that allows contactless payments. This opportunity has huge growth potential, as it connects Synchrony with Venmoʻs more than $50 million users and counting.

Synchrony also signed two other major credit card deals with Walgreens and Verizon. The Walgreens relationship builds out Synchrony's CareCredit financing network, which allows people to pay for health and wellness expenses at some 225,000 different healthcare providers. The company also acquired Allegro Credit, a provider of point-of-sale consumer financing for audiology products and dental services, to be part of the growing CareCredit network.

The other big move last year was launching the Verizon Visa card, which offers benefits and discounts for Verizon customers.

Synchrony is in a great position to grow with these new partnerships. The company is not only efficient -- with a 23.6% return on equity in the fourth quarter, up from 19% in the fourth quarter of 2019 -- but also has a low valuation, with a forward price-to-earnings ratio of 10.2 and a price-to-book ratio of 1.9.

With an attractive valuation and an expanding network, Synchrony should see solid growth in 2021, particularly as pent-up consumer spending increases with the end of the pandemic apparently in sight. Bottom line: This stock is a good buy right now.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Mastercard, PayPal Holdings, and Visa. The Motley Fool recommends Lowes and Verizon Communications and recommends the following options: long January 2022 $1920 calls on Amazon, short January 2022 $1940 calls on Amazon, and long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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