The current economy has created new stocks with high-growth yields. They are exhibiting traits that could transpire into a high yield on cost basis for years to come. Society, in the U.S. and globally, continues to increase the rate of spending via electronic and mobile payments.
The credit card industry leaders have zero debt and are growing at significant rates. Not only are these companies blue chip in stature, but they are likely to be the high-dividend yielders of the future. The key aspect is to ensure you are part of this growing industry. In this article, I highlight two dividend payers and their growth prospects. Visa (V) and MasterCard (MA) lead the charge ahead to high growth dividends.
Visa is a leading global payments processor. Visa started life in 1958 as Bank of America's BankAmeriCard, the first credit card, made of simple paper. This is what the card looked like:
In 1974, BankAmeriCard went global and in 1976, its name was changed to Visa - a simple, easy to pronounce name in all languages. In 1979, Visa debuted Visa Traveler's Cheques. In 1997, Visa crossed the $1 trillion mark for processed transactions within a year. In 2008, 50 years after its inception, Visa listed its shares on the NYSE. As of 2012, Visa had a credit card, debit card, prepaid, commercial and government operations in 200 countries worldwide, connected and managed by Visa's formidable transaction processing, risk management and data network infrastructure.
Visa has relied on innovation, infrastructure, risk management and operational excellence to grow into the giant payment processing company that it is today. Visa also chalked up double digit revenue and earnings growth in its last two fiscal years.
As of fiscal 2011, 54.6% of its transaction revenue came from payments in the U.S. But, a lot of Visa's growth is yet to come with billions of potential credit or debit card holders, thousands of businesses and hundreds of government sector organizations across South America, Africa, Eastern Europe and Asia reaching critical mass to benefit from Visa's traditional services. Visa still has significant growth opportunities across the globe and it's entirely possible that, over time, Visa's non U.S. payment volume will surpass the U.S.
In more mature markets, such as the U.S., Japan and Europe, Visa expects to see increased demand for secure digital wallets - electronic payment services on Internet and mobile platforms. With its brand reputation, decades of experience and services infrastructure, Visa is well positioned to capitalize on increasing global electronic payment flows in the years ahead.
Visa also augments its growth through strategic acquisitions, such as its 2011 acquisitions of PlaySpan and Fundamo. Visa acquired CyberSource in July 2010. CyberSource cost $2 billion in cash. CyberSource is focused upon fraud management and payment security.
Financials: For its fiscal year ended September 30, 2011, Visa reported net operating revenue of $9.2 billion, up 14% over fiscal 2010, operating income of $5.5 billion, up 19%, net income of $3.7 billion, up 28% over 2010, and full-year earnings per share of $4.99.
For its subsequent Q1 2012, ended December 31, 2011, Visa reported total operating revenue of $2.5 billion, up 13.8% over Q1 2011, operating income of $1.6 billion, up 18% year over year, net income of $1 billion, up 16.4% year over year, and earnings per share of $1.49 per Class A share. Visa also reported unrestricted cash of $1.9 billion, total assets of $35.8 billion, zero debt, total equity of $27.3 billion and operating cash flow of $1.3 billion.
Dividends: Visa increased its Class A shares' quarterly dividend from 15 cents to 22 cents in October 2011, which makes for an annual dividend of 88 cents per share and a yield of 0.8% with shares trading in the $114 range as of February 2012. On February 1st, Visa announced a 22 cent per share quarterly dividend. Dividends are typically increased in the 4th quarter. Visa increased the 4th quarter dividend 42% from the 3rd quarter 2011 level.
Additionally, in fiscal 2011, Visa repurchased 43 million shares at a total cost of $3.2 billion, and in the first quarter of 2012, the Board authorized an additional $500 million to buyback Class A shares. Although Visa has consistently increased dividends, its dividend yield is low partly because shares have rocketed from $44 in Jan 2009 to $114 as of February 2012. So while investors have not gained a lot in yield, they have benefited handsomely from share price appreciation.
Shares: As mentioned above, Visa's shares have gained significantly over the past three years and traded between $70 and $115 over the 12-month period ended February 2012, with a price to earnings of 20x and a market capitalization of $76.7 billion.
Peer Group: Visa primarily competes with other large payment processing companies such as American Express (AXP), Discover (DFS) and MasterCard. Over the past decade, Visa also faced fresh competition from a slew of online and mobile payment providers such as PayPal. Ebay (EBAY) owns PayPal and processes a bulk of transactions on Ebay. Ebay is an e-commerce outlet with 3rd parties and corporate entities selling products.
MasterCard is the second largest global leader in electronic payments, including mobile payments. The company acts as a processor, franchiser, and advisor to over 25,000 financial entities. Duties are tied directly to support the management of credit, debit, and associated payment programs. MasterCard and Google have teamed up to develop Google (GOOG) Wallet with PayPass.
On February 7, MasterCard increased its dividend 100% from 15 cents per share to 30 cents per share.
American Express is a leading payment server on a global basis. The business segments are the Global Consumer Group and the Global Business to Business Group. many retailer investors are familiar with the solo relationship with Costco to use its credit card. Warren Buffett's Berkshire Hathaway owns over 12% of American Express. The company has provided a total annualized rate of return of 1.2 % over the past 5 years. This rates four out of four amongst its peer group.
On a personal level, I use my American Express card at Costco. Many other outlets do not accept American Express. The lack of growth and innovation are unappealing to me, as an investor. The quantitative date supports the lack of growth.
Discover Financial Services
Discover Financial Services is a direct banking and payment services company.
The company is a bank holding company under the Bank Holding Company Act of 1956. The company offers credit cards, student loans and personal loans. Discover's Diners Club International is the global payments network. Discover has had an up and down history of dividend payments.
I recommend investors stick with the industry leaders. That tag would apply to Visa and MasterCard. I recommend investors avoid Discover Financial Services shares.
Visa is a dominant player in its sector. It offers a low dividend yield, particularly with shares in the $114 range, which leave little upside should the market correct in 2012. However, if shares do drop slightly, investors may want to consider adding Visa to their portfolios, perhaps more for share price appreciation prospects than for yield.
I recommend high growth dividend investors purchase Visa and MasterCard. Their positions are unrivaled and their futures appear to be very bright. Visa increased the 4th-quarter dividend by 42% over the prior quarter.
MasterCard increased its dividend on February 7, by 100%. These are both high-dividend growth stocks without any debt on their balance sheets.