By Renee O'Farrell
Credit card companies make great investments. You get all the perks of investing in a finance company, like surges when the economy is good, but there is a higher degree of consistency - after all, people use their credit cards regardless of the economy and most maintain some balance (only 30% of people pay their balance off each month). Further, many credit card companies make money from the use of debit cards, which have rapidly grown into a standard fixture in most wallets. Roughly 75% of people in the US use debit cards.
The point is, there is a fair amount if money to be made, if you put your money on the right horse.
Visa (V) is trading at $118.51 a share right now and has returned 16.94% year to date. The $96.46 billion market cap credit card company has a forward price to earnings ratio of 16.76. Consensus estimates put Visa's earnings over the next five years at 19.24% a year on average. It pays a 0.74% dividend yield on a 12.08% payout ratio. Visa is a popular stock amongst hedge funds - and why not? It is a consistent earner and, now that the economy is starting to rebound, Visa is poised to do great things. Warren Buffett upped his Berkshire Hathaway's stake in the company by 25% during the fourth quarter. Stephen Mandel's Lone Pine Capital and Chase Coleman's Tiger Global Management are also fans.
MasterCard (MA) recently traded at $436.12 a share, up over 17% year to date. At this price, the company is trading at 16.66 times its future earnings. Analysts expect MasterCard's earnings to grow by 18.21% a year on average over the next five years. It has a market cap of $55.12 billion and pays a 0.28% dividend yield on a 4.69% payout ratio. MasterCard may fall into Visa's shadow in someways but that doesn't mean that the company is any less of an investment opportunity. Chase Coleman's Tiger Global Management likes this stock as well. It could be a case of hedging, but really both Visa and MasterCard are priced fairly low and have strong earnings growth estimates.
American Express (AXP) is trading at $60.10 a share, up over 28% year to date. The company, which has a $69.17 billion market cap, is priced at about 12.55 times its future earnings. Analysts expect American Express' earnings to increase by an average of 10.97% a year over the next five years. The company pays a 1.33% dividend yield on a payout ratio of 17.64%. American Express' low earnings expectations give me some pause. After all, the market is expected to bring in about the same, so why take the risk? The hedge funds we track seem to be divided on American Express. Funds like Bridgewater Associates, Dreman Value Management and Vinik Asset Management either sold out of slashed their positions in the company during the fourth quarter while funds like Jim Simons' Renaissance Technologies initiated new positions. I recommend the company as a hold right now.
Discover (DFS) is the smallest of the group with a market cap of just $17.77 billion. The company is priced low at just 8.75 times its future earnings, but its earnings expectations are also low. Analysts say this company's earnings will increase by just 9.40% a year on average over the next five years. Discover recently traded at $33.50 a share and is up roughly 40% year to date. The funds we track were even less encouraged about Discover. While 10 funds either initiated positions in the company during the fourth quarter or increased their stakes, over 30 sold or reduced their holding in the company. I say pass on Discover.