The credit card industry is an interesting, and often profitable, place to invest your money. This business sector has survived the global economic crisis and could once again be a very lucrative holding for your stock portfolio. The following credit card giants are all experiencing high customer loyalty, increasing consumer confidence, low debt, and strong assets, which could translate into gains for investors. In this article, I will focus on five key players in this industry: American Express Company (AXP), Discover Financial Services (DFS), Heartland Payment Systems (HPY), Mastercard (MA), and Visa (V).
American Express offers charge and credit card products, and travel-related services worldwide. This $61.5 billion enterprise is currently sitting at nearly 10% above its 200-day average of $48.18. The stock price is up more than 19% for the year, and the company pays a dividend of $0.72 for a yield of 1.4%.
While the company's quarterly revenue increased by 3.5% and its earnings by 12.2%, American Express continues to look for additional growth. This push is evidenced by its decision to allow cardholders and merchants to have access to Twitter's new small business advertising. Capitalizing on the appeal of social media is just one reason that the company continues to draw fresh investors. While its price-to-book (3.24) and debt-to-equity ratios (currently at 331) are both high, the company has $25 billion in total cash to sustain it. I see potential in American Express going forward, and recommend it as a buy at this time.
People who hold Discover cards obviously love them; Discover Financial Services has 16 consecutive years as the top brand for credit card customer loyalty. Not only meeting customer expectations, Discover is also a very good investment. This mixed growth and dividend stock has seen a solid rise in share price (40% over the past year) while recording an increase of 23% in quarterly revenue and 47% in earnings. Its projected target estimate of $30.50 represents a potential growth of over 3%. The stock is trading more than 20% above its 200-day moving average of $24.79.
In addition to its share price, Discover has fostered investor loyalty by paying dividends, currently set at $0.40 for a yield of 1.4%. I believe that Discover still has upside. The price-to-book ratio is a reasonable 1.9, and its forward price-to-earnings ratio is a modest 8.74, suggesting that the share price has room to grow. Although its debt-to-equity ratio is high at 222, I believe the company is showing strength and will likely continue its growth. I have rated Discover as a buy at this time.
Although it is not a company that issues credit cards, Heartland Payment Systems is an important part of the industry. Heartland is a payment processor, a company responsible for handling transactions between financial institutions. Heartland, for example, gained notoriety for being the official concessions payment processor of Super Bowl XLVI, handling the payments of over 660 point-of-service terminals at Lucas Oil Stadium in Indianapolis, IN. The company has a target estimate of $32, giving it a potential double-digit gain for 2012 after its 44% rise in 2011.
While Heartland Payment Systems continues to record increases in share price, it is also a dividend payer. The company currently offers an 0.9% yield on its $0.24 annual dividend, which is up from its previous $0.16. Although the company's revenue dipped 1.4%, its quarterly revenue was up an impressive 69% year to year. Its price-to-book ratio of 5 is quite high, but its price-to-earnings ratio is a reasonable 17, and its debt-to-equity ratio is a very nice 38.6. With consumer spending likely to increase over the next year, this is a good stock to own.
One of the true heavyweights in this financial services sector, Mastercard is a $50 billion that, along with Visa, has been a pillar of the business for decades. Its share price of $400 is more costly than its three main competitors combined; the company's steady growth over the past year and the increasing consumer confidence combine to make Mastercard look like a great investment again in 2012. The stock has a one-year target of $430, a gain of 7.5%, which is added on top of the 60% increase it has enjoyed over the last 12 months.
Even though its decline in earnings (down 95%) and its high price-to-book ratio (now at 8.5) are disconcerting, there are several reasons why Mastercard is an excellent buy. The company still has a good forward price-to-earnings ratio at 15, and it is a steady dividend payer, currently doling out $1.20 per share for a yield of 0.3%. More importantly, the company has no outstanding debt and it is holding nearly $5 billion in total cash. Rapidly increasing share prices, annual dividends, zero debt and its status as a Berkshire Hathaway (BRK.B) holding all make an effective case for buying Mastercard at this time.
If Mastercard is a pillar in the credit card industry, Visa is right there beside its rival. The biggest of the four main companies, this $94 billion business had a great 2011, outperforming its more expensive rival and putting it in position for a very good 2012. With its stock price currently at $115, the 56% rise over the past 12 months was driven by its 13.8% gain in revenue and 16.4% climb in earnings. Like Mastercard, Visa is debt-free and the payout for its dividend ($0.88 for a yield of 0.8%) is a very manageable 16%. Considered a cash king, the company managed to convert over 40% of its sales in the past year into free cash flow. (This is compared with 38.8% for Mastercard and 57.9% for Discover Financial Services.)
Along with its recent gains, the company's volatility is low (beta of 0.46), and its dividend is the best among its competitors. With its growing earnings, steady dividend, debt-free status and more than $1.7 billion in free cash flow, Visa is outperforming the market and likely to continue doing so. I recommend buying shares of Visa at current price levels.
The financial services sector looks very good, and credit cards are some of the best options it has to offer. Although I currently favor Visa for its big gains and sector-leading dividend, I would recommend a holding in any of the others in this group. American Express Company, Discover Financial Services, Heartland Payment Systems Inc and Mastercard Incorporated all have the kind of strength and stability that can help nearly any portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.