Cash is dying a slow and steady death at the expense of plastic transactions – a trend that continues to bode well for the likes of Visa Inc. and MasterCard Inc.Elise Amendola/The Associated Press
The economy can stumble, retailers can face intense competition and consumer confidence can turn weak, but credit card companies always sail through in great shape.
The reason is simple: Cash is dying a slow and steady death at the expense of plastic transactions – a trend that continues to bode well for the likes of Visa Inc. and MasterCard Inc.
If you're a consumer who has trouble resisting impulse purchases and then faces steep interest charges on your credit card balance, this trend might not be anything to celebrate. For investors in credit card companies, though, it is a thing of beauty.
Since going public in 2006, MasterCard has risen more than 1,780 per cent, and Visa has risen more than 350 per cent since going public in 2008. The financial crisis – the one that nearly shattered the global economy and has left its mark on unemployment and spending habits ever since – barely registers as a blip on their stock charts.
The global crisis is nearly invisible in their earnings growth, too. In 2007, prior to the crisis, MasterCard earned an adjusted $5.81 (U.S.) per share; by 2012, earnings per share had nearly quadrupled. In the most recent quarter, MasterCard reported that credit- and debit-card spending in Europe grew 14 per cent – further reinforcing its look of imperviousness to economic stagnation.
For sure, these are hardly undiscovered gems. This year alone, Visa has risen an impressive 31 per cent and MasterCard has jumped 50 per cent, hitting record highs and easily outperforming the S&P 500.
The gains have certainly pushed up valuations, with the stocks now trading between 23 and 28 times estimated earnings. That would be a sure sign of trouble ahead for most stocks, but these aren't most stocks: Visa and MasterCard tap into a powerful move toward a cashless world, and this trend is by no means exhausted.
Just take a look at their latest quarterly results. Visa's adjusted earnings grew 15 per cent while revenue rose nearly 9 per cent, even as the global economy continues to struggle. MasterCard's earnings grew 14 per cent and revenue rose 16 per cent.
By all indications, this growth will continue for many years. According to McKinsey & Co., cash transactions in the United States still account for 29 per cent of retail payments – but that is estimated to fall to just 10 per cent within 30 years. And the U.S. is a relatively mature market. The biggest growth opportunities are in much of the rest of the world, where cash still dominates transactions, but the trend toward plastic is inevitable.
It's a good bet that existing credit card companies will be the biggest winners as more consumers alter the way they buy things. Their massive global infrastructures – facilitating billions of transactions each quarter – and deep relationships with banks and customers keeps upstarts at bay, providing what Warren Buffett likes to call a competitive "moat."
Visa and MasterCard are also rewarding investors in other ways. They are spending vast sums in share buybacks and boosting their quarterly dividends. Visa announced a $5-billion buyback plan in the most recent quarter and raised its dividend by 21 per cent. MasterCard doubled its quarterly dividend at the start of 2013.
The biggest question for investors: Which stock to choose? They're not identical: Visa is more geared to the U.S. market, which contributes more than half of the company's revenue. MasterCard is a better play on foreign markets, which account for about 60 per cent of revenue. And in terms of share price performance, MasterCard has been doing loops around Visa in recent years, thanks to a bigger growth rate outside the United States. Still, it's hard to make a clear distinction. The best bet: Buy them both and you eliminate the possibility that one will underperform the other – and you still get a piece of every transaction.