Comparing Credit Card Companies Isn't As Easy As It Looks

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Includes: MA, V
by: William Darusmont

Summary

Which credit card company should you own?

Are performance numbers sometimes misleading?

Maybe we have been looking at things wrong?

Given the triple-digit prices on both Visa (V) and Mastercard (MA), some investors choose both. But for smaller investors, choosing one might not be just a choice but a necessity. Also, while both have performed exceedingly well over the past five years, investing in both might actually increase your risk in a broad market sell-off. This article will deal with laying out reasons why owning one might be your best bet.

Some might ask why American Express (AXP) is not included: Its performance pales so much when compared to the other two that it will be ignored for our purposes. The loss of Costco (COST) by American Express to Citi Visa has, at the least, diminished AXP's competitiveness.

Costco switched to Citicorp Visa in July 2017 and it has been suggested that they must have had to make a lot of concessions to get the business. It is quite possible that AmEx didn't get as much "other business" off the Costco AmEx card since it isn't accepted in as many places due to their higher fees. In other words, Costco members might have been doing little business besides their Costco shopping, whereas more people use Visa and more stores accept the card.

While Mastercard is largely held by insiders, mainly big banks, of more interest to me are the institutional holders. Visa clearly wins with 92% held institutionally vs. 77% for Mastercard. Visa pays a slightly higher dividend (0.60% vs. 0.50%). While that is not a significant factor in itself, the large difference in share price adds value when considering investing the same amount of dollars in each security.

A little history is in order. While Diners was the first credit card and was popular among business people, American Express introduced their card in 1958 as an addition to their Traveler's Checques, but the balance was due each month. In 1966, Interbank/Mastercard was created by a consortium of California banks that had to find a way to compete with the Bankamericard. In 1976, Bank of America consolidated all their domestic and international cards and created Visa, along with their correspondent banks, and later got a big boost when Credit Lyonnais joined making Visa cards acceptable all over Europe.

Is one card better than another? Only on the basis of preference or benefits bestowed by the different classes of cards. We will look at performance over the past five years and try to determine which will be best going forward.

First, I looked at total returns (which include reinvested dividends) over the past five years:

1 yr

3 yrs

5 yrs

V

39.4% +94.0% +216.9%
MA 56.1% +11.9% +218.7%

Next, I looked at price action over the past 12 months and they tracked almost perfectly until July 25th, when both stocks fell - but MA much more abruptly. There is a definite narrowing of spread occurring:

12 mos 6 mos 3mos 1 mo 7/25/18
V +38.1% +20.1% +7.8% +2.5% +0.3%
MA +55.1% +22.5% +6.1% -0.3% -2.0%

Based on Friday's close, V was $139.82 while MA was $201.20, or a 44.7% premium. In order to compare them, we need to use equal dollars. Here are the results: One share of MA at $201.20 would buy 1.44 shares of V. Thus MA has to perform 44% better than V to give you the same dollar return. In addition, the 0.60% annual dividend on V is more than MA's 0.50%; not a big difference unless you are reinvesting those dividends each time.

It is important when comparing securities that you have the same amount invested in each. We know that based on the price as of Dec. 31, 2016, MA clearly outperformed - but can it, and will it, still do so? The evidence shows slippage.

Lastly, individual investors tend to buy blocks of 100 shares. This goes back to the "good old days" (which weren't so good!), when broker commissions contained odd lot charges. Nowadays, using any reputable full service broker like Schwab or Fidelity, you can get execution on 10 or 1,000 shares for under five dollars. If you are paying more, you are getting ripped off.

Professional money managers (RIAs), however, tend to invest equal amounts in each stock. This follows Buffet's theory that you don't need more than 20 stocks in a portfolio. But the key is to review annually and rebalance as necessary. Few individuals ever rebalance! Why is it so difficult for RIAs to beat the SPX? Because they tend to let dividends accumulate then invest them, whereas the index reinvests dividends when they go ex-dividend (which can be a month or more after the ex-date).

As a result of doing this analysis last April, I went long V at $127.15 and have no plans to sell it. That is not to say that MA couldn't outperform, but given the additional shares I was able to buy, that will be hard to do. If my portfolio and holding size were larger I might choose to own both.

Disclosure: I am/we are long V.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.