This article will discuss the performance of two related companies, ("Visa (V)") and ("MasterCard (MA)"), and attempt to determine which would be the most profitable for investors. It will look at recent performance, financial metrics, and company outlook going forward. After a brief discussion of both companies, I will compare the two, and hopefully offer investors insight into why you would want to prefer owning one stock over the other.
First, both of these companies operate in the financial space as a global payments provider. As consumers increasingly rely on credit cards and innovative payment forms over cash and checks, this sector is poised to continue to be more relevant, and profitable, in the short and long term. While American consumers are becoming more reliant on card payments, so are consumers worldwide as new markets open up for credit cards that did not exist before. This is a play on growing middle classes in emerging markets around the world as they adopt this habit as well. Additionally, credit markets are historically tight right now. As standards loosen, which I expect to occur as we continue our pattern of growth, more credit will be available and will be lent out, both to consumer and business accounts, and that should increase the profit margins of these companies.
First, I will discuss Visa. V is a global payments technology company that has operations in 200 countries and territories. Its core business is offering fast, secure and reliable electronic payments. The Company derives revenues primarily from fees paid by its clients based on payments volume, transactions that it processes and other related services. The stock is currently trading at over $175/share and has a dividend of $.33/share, paid quarterly, which yields investors .75% annually. Year to date the stock is up close to 16%, and over the past 52 weeks the stock is up 42%. Clearly, the stock is performing well.
A look at the company's 10-K also reveals some positive metrics. One thing I definitely like about the company is its commitment to increasing its dividend. It has increased every year since 2008 by at least 19%. Additionally, operating revenues grew steadily over the same time period, and its total assets have also grown by over 17%.
Another positive I see for the company is that operating revenues are up in all their key areas, including the U.S. and Europe, but most strongly in the rest of the world. One of my key investment themes over the past few years, and one that I still feel is relevant, is to invest in U.S. companies that have international exposure. V certainly fits that bill. Operating revenues from the "rest of the world" are up over 16% year over year, a sign that V is capitalizing on emerging market's increasing reliance on credit cards and electronic payments.
I also like the fact that V is the largest retail electronic payments network in the world, based on total volume and number of transactions. According to the company's 10-K, the firm has twice the number of cards issued over MasterCard, its closest competitor, with almost 55% higher payments volume. According to the company's 10-Q, which includes data through March 31st, these trends have also continued in to the first quarter of 2013. (Both the 10-K and the 10-Q for V can be found here.
However, there are a few areas of concern for me. One, while the commitment to the dividend is notable, the yield is not attractive enough on its own for me to consider V as an investment. While the company has attempted to increase the yield, the stock has performed so strongly that the yield has stayed depressed. This is not a problem in itself, since shareholders have been rewarded, but it does not offer the steady stream of preferred income that I look for.
Two, from 2011-21, liabilities grew at a much faster pace than assets, at almost 50%. The main reason for this was an increase in funds set aside for "unresolved legal matters", to the tune of $4 billion. While this means that the company has enough cash on hand to defend itself against claims and settle them accordingly, such a large commitment to litigation expenses gives me reason for concern and this is an area I would have to monitor on a quarterly basis to ensure that it is a one-time charge and not something that is recurring on a consistent basis. This charge has also hurt the company's operating margin, which was down significantly in 2012 from 2011. This is another metric to monitor in future quarters to ensure this trend is reversed.
A final point of concern for me is that in 2012 share repurchases were down significantly from 2011, by about 65%. When a company buys back shares it is signaling to the market that it believes its shares are undervalued, for it has hopes of reissuing those shares back later at a higher price. The fact that share repurchases are down is a indicator to me that V's management does not believe the stock is as attractive as it was a year ago, and should give some caution to investors, who may want to wait for a pullback in the stock.
There are some risks for V going forward. While its performance in areas outside the U.S. and Western Europe seems to be largely positive, it does open up the country to increased foreign exchange risk and makes the company more susceptible to currency fluctuations as it expands the size of its business and moves in to new parts of the world. Additional risks to the company include increased government regulation, both in the U.S. and around the world, which could limit its fee income by restricting both the fees it can charge and the number of transactions it can process. The company sees this as the most significant risk going forward, so investors would need to stay informed of the regulatory environment, both in the U.S. and abroad, to monitor the appropriateness of this investment option. Additionally, lower consumer spending and confidence will hurt the company, but so far into 2013 both are up. All these are risks that are not unique to V, but to MA as well.
Now I will discuss MA's recent performance. MA is also a global payments and technology company specializing in providing electronic forms of payment. Its customers include financial institutions, merchants, and government entities. The stock is currently trading at $545/share and has a quarterly dividend of $.60/share, yielding .44% annually. Year to date the stock is up 12% and it is up over 24% over the last 52 weeks. According to its most recent quarterly filing, the 10-Q, shows that net revenue is up over 7% since 2012 and operating expenses are up 5.5%. This translates to higher net operating income for MA, always an encouraging sign. Net income is up almost 11% in 2013 from 2012, which should bode well for the stock going forward.
The company has seen growth in transactions from all of its markets, including (albeit slower growth) in the U.S. While MA is exposed internationally to more than 150 countries, it is heavily reliant on the U.S. Roughly 1/3 of its business comes from the U.S., which has the slowest volume growth, tied with Canada, out of any of the markets it services. MA is seeing tremendous growth in Asia Pacific/M.E./Africa region, at 21% in 2012. However, this is down from 31% in 2011 and MA does less business in this region than in the U.S. and Europe, which are offering slower growth rates for the company. (MA's 10-K and 10-Q can be found here.)
Some other metrics are favorable for the company. The company doubled its dividend in February to $.60/share. While even with that increase, the yield is not great, if MA continues to increase its dividend at this pace the yield could eventually become attractive. Additionally, MA has a PE ratio of around 25, much lower than V's PE of 80, which means that MA's stock price is better supported by its earnings. Both of these PE's are high for the industry, as competitors such as Discover Financial Service (DFS) and American Express Company (AXP) have PEs of 10 and 17, respectively (as well as higher dividend yields).
Other risks for MA, such as increased regulatory measures and financial risks, were discussed earlier in this article because they are relevant to both MA and V. Additionally, if MA is unable to diversify away from its heavy reliance on the U.S. market, the company will not experience the same levels of growth as V over the next 5, 10, and 20 years. This is an immediate concern for me because as V moves into these emerging markets at a faster pace, it is gaining first-mover advantages and building its brand loyalty. MA will struggle to wrestle power away from V, and the fact that its growth in emerging markets is already slowing is a telling sign. Finally, MA, like V, has also slowed share repurchases substantially. Given the recent performance of the stock, I would not expect this attitude to change, so investors should not expect repurchases at MA to outpace V's.
Bottomline: The trend towards electronic payments shows no signs of slowing down, and both V and MA are global forces in this space. As consumer spending continues to climb, both in the U.S. and worldwide, both companies will benefit. The trend across the world is a lesser reliance on cash for payments, and investors want to be exposed to this generational play. MA's recent performance lags that of rival V, but it has still rewarded investors handsomely.
While I am a firm believer in buying stocks supported by their earnings, both MA and V trade at multiples higher than the industry average, so buying MA is not that much safer in my opinion. Coupled with the fact that it has a higher beta than V, V seems to be the safer play for investors. The stock has performed better, and V has greater exposure worldwide. By focusing its efforts on faster growing emerging markets, V seems better exposed to capitalize on the growth in these regions and is better diversified.
I still see MA as a solid company that is beginning to make strides in this area and I will watch MA going forward for the next few years to see if it continues to raise its dividend at an aggressive rate, and begins to lessen its heavy reliance on the U.S. However, I cannot overlook the fact that its growth in the Asia/ME/Africa region is slowing. While both companies offer exposure to an increasingly important sector, I tend to prefer companies that are market leaders in their industry, because they tend to outperform their rivals in both the short and long term. Because it beats out MA in terms of global reach, payments volume, and number of customers, for the moment I'm betting on V.