Investing in credit card stocks is essentially investing in a fintech oligopoly. There are very few players and they control the majority of the market. The credit card companies control the online economy and are moving the money all around the world through technology.
Other fintech services such as PayPal, Square, or Stripe, to name a few, are rising and they all connect to a credit card to execute a transaction.
We are moving to a cashless society and credit cards offer the ultimate in consumer convenience. They allow customers to quickly purchase items and delay payment until they are ready to pay at a later date. In most cases, the risk of default is associated with the financial institution and not the credit card company. The credit card company is mostly just a toll booth where it retains a percentage of the transaction.
Credit Card Stocks
Here is the summary of the four major credit card companies. None are big dividend payers but you’ll see that they all have a decent growth pattern below.
|V||Visa||Financial Services||Credit Services||38||173.44||379.03||35.76||32.31||4.85||0.58||20.62||4||1.00||20.36||1|
|MA||Master Card||Financial Services||Credit Services||52||264.47||270.13||44.00||34.72||6.01||0.50||21.96||4||1.32||16.54||1|
|AXP||American Express||Financial Services||Credit Services||47||124.73||104.16||15.83||15.46||7.88||1.25||19.80||4||1.56||8.43||1|
See the Google Trend on each of the companies as an indication of exposure. Do note it is not a reflection of revenue or the number of cards issues. It rather provides an insight of the brand awareness.
If Visa, MasterCard and American Express are good enough for Warren Buffett’s portfolio, it should be good enough for you!
VISA operates in more than 200 countries making it a large conglomerate providing international diversification. After establishing its business as Bank Americard in 1958, it changed its name to VISA in 1976 one year after the debit card was introduced.
The popularity of the Visa brand can be gauged from the fact that nearly 173 billion global transactions are processed each year through VisaNet and there are 3.3 billion Visa cards in use today. A majority of credit and debit cardholders in the US prefer Visa.
With nearly six decades of experience in this field, Visa has successfully built an extensive footprint extending to every corner of the world. Today, the company has a presence in more than 200 countries and territories worldwide. Given its worldwide popularity, Visa stands in a good chance to benefit from the rapidly growing e-commerce industry and increasing number of digital payments worldwide.
Visa operates one of the most sophisticated payment processing systems in the world and connects people worldwide through its innovative payment solutions. A robust business model, a global distribution network, strong client partnerships and a powerful brand are Visa Inc.’s strong competitive strengths. The company is considered as one of the most well known brands and is widely trusted by people globally.
Over the years, Visa has developed strategic relationships with clients and partners, and continues to enter into new partnerships and agreements to maintain its leading position in the digital space. The company develops and continually invests in technological innovations to enhance the consumer experience.
Visa is also growing through acquisitions. Visa Europe, the largest payments bank in Europe, is the latest acquisition which is being integrated. The acquisition has led to the creation of a single large global company. Major economies around the world are going cashless, and Visa through its ubiquitous presence is well positioned to continue to lead this digital transformation.
Visa has a history of paying dividends regularly to its shareholders. The company last raised its dividends by 19% and has a current dividend yield of 0.7%. The company also offers an attractive share buyback policy. Given the continued growth in ecommerce trade, Visa should continue growing its top line. The company has projected its 2019 revenues to grow in the low single digit rate which should aid in continuing its dividend payment streak in future.
MasterCard is a leading global payments company facilitating electronic funds transactions throughout the world. The company engages in authorizing and settling payment transactions and delivering related products and services.
MasterCard has a presence in in more than 210 countries and territories. The company operates through well known brands such as MasterCard, Maestro, Cirrus and Masterpass. For a third time in a row, MasterCard was ranked amongst the Most Ethical companies in the world.
With nearly five decades of existence, MasterCard has been finding innovative ways to make payments safer and faster. The company caters to the needs of diversified customers ranging from individual consumers, merchants to governments, public sector and businesses etc. The company runs 1300 programs with governments in 60 countries and partners with leading industry names such as Uber, Unilever etc.
MasterCard continues to expand with the acquisition of Brighterion, a software company specializing in artificial intelligence as well as NuData Security, a company that helps prevent online and mobile fraud. The acquisitions so far have helped the company in enhancing its technological and geographical footprint. A global network, an efficient and fast payments processing network, and globally recognized brands are the company’s biggest strengths.
MasterCard is focusing on growing its customer base and creating new products and services. Its software-driven solution Masterpass QR is now live in 11 markets and poised to roll out in an additional 13 markets, including countries in Asia Pacific, Latin America, the Middle East and Africa. MasterCard’s technology solutions are not only secure but also efficient and work effectively throughout the globe. The company is trusted for transaction safety and security and supporting seamless transaction flow.
The company is set to benefit from the trend of using technology for e-commerce anywhere, anytime, through any device. The total addressable market for payment flows is $225 trillion.
MasterCard last raised its dividends by more than 13%. The company also has a share buyback plan in place. Growing number of payments and international transactions should help the company continue paying its dividends.
American Express Company
American Express is a global financial services company with its headquarters based in the US.
The company has a rich history dating back to 1850 and is one of the most valuable brands in the world today. It sells products and services to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations.
American Express operates through four reportable operating segments: U.S. Consumer Services, International Consumer and Network Services, Global Commercial Services and Global Merchant Services. Discount revenue (the fees charged to merchants for using American Express cards) is the largest contributor to its top line. The company derives almost three-fourths of its revenues from fee revenue and balance from interest income. This makes American Express less susceptible to interest rate fluctuations, unlike most of its peers. High-end credit card products and an affluent customer base further adds visibility to cash flows, helping boost the credit quality and lowering the write-off rate.
Moreover, a large portion of its loan growth came from card members last quarter, which shows the company’s ability to generate multiple income streams from existing customers.
American Express operates through diverse businesses ranging from travel to cards, to innovative digital products and services. The company offers credit card products and travel-related services to consumers and businesses around the world. American Express also offers attractive rewards to its high-spending card members. Its “spend-centric” business model incentivizes card members to spend more on their cards which help accrue more revenues for the company.
American Express is targeting premium customers and strengthening its foothold in the commercial payment space. A trusted brand, robust business model and strong financial expertise are the company’s core strengths. 2017 marked the end of a two-year plan as American Express successfully executed against strategic priorities such as accelerating revenue growth, optimizing investments and resetting cost base.
The company is subject to comprehensive government regulation and supervision in jurisdictions around the world, which act as significant entry barriers for newcomers.
American Express has raised its dividends for the last seven years in a row, though the company has been paying dividends for decades. The company raised its last dividend payout by 11%. Its payout ratio has been reasonable at near 30% which provides enough room for future dividend growth.
As per the company’s Comprehensive Capital Analysis and Review (CCAR) plan, it targets to increase the quarterly dividend to 39 cents per share beginning with the third quarter 2018 and repurchase up to $3.4 billion of common shares during Q3’18 – Q2’19. A booming US economy and historically low unemployment rates are tailwinds for American Express and should help in future dividend hikes.
Bottom Line on Credit Card Stocks
Just like we invest in utilities to profit from our demand on energy, we could invest in credit card companies to profit from our payment behaviour evolution. Think about it, how many purchases have you done with a credit card compared with a bank card or cash? The incentives are all there to use the credit card with all the point systems. I have a total of 3 credit cards in my wallet at all time. Each for its own purpose (and I ALWAYS pay them in full).
Credit card companies are relatively new companies when you compare them with Coca-Cola NYSE:KO or Johnson & Johnson NYSE:JNJ so it will take time before we see them on S&P500 Dividend Aristocrat list but they are worth paying attention to.
The business of credit cards companies is a number’s business based on the number of clients they can acquire around the world. Once acquired, it behaves like a subscription for the credit card company where recurring revenue is flowing in. Managing and curating the revenue is what the companies focus on.
I currently (at the time of writing) own both VisaNYSE:V and MasterCardNYSE:MA. As you have seen above in the Google Trend and stock performance graph, they outperform American ExpressNYSE:AXP and I expect them to continue to do so. See my portfolio for a detailed list of my holdings.
I have relied on the Chowder Score to drive my decision on which holding to buy. Visa was a clear winner when I first initiated a position and recently MasterCard is leading with the dividend growth. My opinion is that you would do well with either and I prefer them over Amex in the end.
DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.