July 6 (Bloomberg) -- Discover Financial Services, the credit-card company that got $1.2 billion from the U.S., plans to sell $500 million of common stock to raise funds for its bank or to buy back some of the government stake.

Proceeds also may be used to invest in the business or for general purposes, according to a statement today from Riverwoods, Illinois-based Discover. Underwriters led by JPMorgan Chase & Co. may increase the offering by 15 percent to meet demand and a debt issue is planned, Discover said.

Discover accepted $1.2 billion in March from the Treasury’s Troubled Asset Relief Program, and Chief Executive Officer David Nelms said last month there’s no rush to repay. American Express Co. and Capital One Financial Corp. returned almost $7 billion to the Treasury’s rescue fund in June.

“They’re one of the better capitalized companies” among card issuers, said Michael Taiano, analyst at Sandler O’Neill & Partners, who has with a “hold” rating on Discover. “I don’t know if it made sense for them to hold onto that capital.”

Repaying the government would give Discover flexibility to repurchase shares in the future, Taiano said. The preferred stake pays 5 percent dividends for the first five years, and 9 percent after.

Discover rose 36 cents, or 3.6 percent, to $10.50 at 4:15 p.m. in New York Stock Exchange composite trading, and slipped to about $9.53 in after-hours transactions. The shares gained 10 percent this year.

To contact the reporter on this story: Laura Marcinek in New York at lmarcinek2@bloomberg.net

Last Updated: July 6, 2009 17:56 EDT