Credit Card Stocks: Visa, Mastercard, or Amex?

Credit Card StocksThere are 3 big credit card stocks worth looking into; Visa NYSE:V and MasterCard NYSE:MA are major international players while American Express NYSE:AXP is more of a North American player.

Credit Card Stocks – The Business Model

We all understand the purpose of a credit card and its usage in the developed world. It clearly can provide benefits when used properly while unfortunately enabling others to spend beyond their means. Both patterns end up being a benefit to the credit card companies as it happens since there is a transaction used within their network from which they are paid a fee.

Thkeywordord is network as it’s the core of their business model. Each of the credit card companies has built a network that guarantees a card holder can use their card at any possible point of purchase. Their network is basically technology that authorizes and processes payment. It moves the money around safely and securely. While you may think PayPal (NASDAQ:PYPL) was the new kid on the block for online payment, the reality is that most PayPal users would link a credit card to their account and use it for the transaction. PayPal happens to offer the ability to use your bank account as an option which is not often the case if you shop at some online retailers.

As online spending continues to increase, the credit card companies are bound to benefit further as the primary choice for transactions. One interesting fact is that credit card companies do not actually take on the consumer’s risk from a payment perspective as the financial institution providing the card takes that risk. The credit card company has to, however, manage the risks of fraud at the card level. The financial institution ultimately approves the credit card requests based on the client’s credit record.

There is a difference between American Express and Visa or MasterCard in that your AMEX is issued by AMEX as opposed to the financial institution. In fact, American Express is a one-stop shop where it issues the credit card, authorize the purchases and settles with consumers and merchants while taking on the risks from the credit card holders. In turn, AMEX can earn more from the transaction compared with Visa or MasterCard.

Financial Summaries

It’s time to look at the numbers! Below is a comparative set of numbers between the three companies.

  • Stock: V
    • Market Cap: $186.13 B
    • P/E: 30.05
    • Dividend Yield: 0.72%
    • Dividend Payout Ratio: 21.79%
    • IPO: March 18, 2008
  • Stock: MA
    • Market Cap: $103.85 B
    • P/E: 28.65
    • Dividend Yield: 0.80%
    • Dividend Payout Ratio: 22.89%
    • IPO: May 26, 2006
  • Stock: AXP
    • Market Cap: $61.62 B
    • P/E: 12.72
    • Dividend Yield: 1.82%
    • Dividend Payout Ratio: 23.20%
    • IPO: May 18, 1977

credit cards market capitalization

As you can assess, all of them have a low dividend yield and maintain a generally low dividend payout ratio. Cash is probably re-invested in the business and therefore used to generate stock appreciation.

Credit Cards History

One point I want to surface is how new to the stock market Visa and MasterCard are. It’s practically impossible for those companies to be Dividend Aristocrats since they have been available on the stock market for 10 years or less. Compared with many long-standing companies and their dividend history, Visa is on the right track for being a worthy dividend growth investment.

Core Metric #1: DIVIDEND GROWTH

Dividend Snapshot
Dividend growth consistency is where dividend paying stocks can differentiate themselves. When a consistent dividend grower a raise dividends at a higher rate through any markets, you know there is strength in the business.

Here is the performance of each stock. Only AXP has 10 years worth of data since V and MA are recent IPOs. MasterCard has unrealistic growth so it feels like they are trying to catch up and Visa has strength but it’s hard to maintain that growth without increasing the payout ratio. As for American Express, it’s a pretty good growth overall. It’s too bad AXP doesn’t have consistent dividend increases as you will see below.

  • Stock: V
    • 3 year CAGR Dividend Growth: 26.41%
    • 5 year CAGR Dividend Growth: 30.64%
  • Stock: MA
    • 3 year CAGR Dividend Growth: 85.48%
    • 5 year CAGR Dividend Growth: 62.03%
  • Stock: AXP
    • 3 year CAGR Dividend Growth: 12.14%
    • 5 year CAGR Dividend Growth: 8.85%
    • 10 year CAGR Dividend Growth: 8.65%

Both Visa and American Express have grown their earnings at a pace on par with its dividend growth while MasterCard is quite behind.

Core Metric #2: DIVIDEND PAYOUT RATIO

In general, the payout ratios look pretty stable across the companies and over time. MasterCard shows they increased their dividends probably to stay in line with the competitors and return some cash to investors.

  • Stock: V
    • Current Dividend Payout:  21.79%
    • 3 year Dividend Payout Average: 19.04%
    • 5 year Dividend Payout Average: 20.29%
  • Stock: MA
    • Current Dividend Payout:  22.89%
    • 3 year Dividend Payout Average: 16.32%
    • 5 year Dividend Payout Average: 11.55%
  • Stock: AXP
    • Current Dividend Payout:  23.20%
    • 3 year Dividend Payout Average: 18.98%
    • 5 year Dividend Payout Average: 18.86%
    • 10 year Dividend Payout Average: 22.66%

Core Metric #3: CONSECUTIVE DIVIDEND INCREASES

  • Stock: V
    • Consecutive Dividend Increase: 7 years
    • IPO: March 18, 2008
  • Stock: MA
    • Consecutive Dividend Increase: 4 years
    • IPO: May 26, 2006
  • Stock: AXP
    • Consecutive Dividend Increase: 4 years
    • IPO: May 18, 1977

I would argue that only Visa has proven out to have consistency since its IPO. MasterCard ended up with only 4 years of dividend increases and the same with American Express.

Investment Philosophy #1: BUSINESS QUALITY

As explained in the introduction, the credit card business is an oligopoly and a financial service used by most adult for purchasing items daily. Apple Pay or PayPal don’t even disrupt the credit card business as they leverage it.

The business quality is simply remarkable. Not much come close to this outside of regulated industries.

Investing Opportunity Score

The investing opportunity score is setup to surface opportunities based on current values compared with historical data.

  • Stock: V with 54%
  • Stock: MA with 56%
  • Stock: AXP with 69%

A really good score ends up in the low 80% and a stock with negative EPS tends to be rank low. What boosts AXP is its dividend yield and the fact that it has pulled back from its 52-week high.

While I look at the score as an indicator for research, it’s clear that amongst the credit card blue chip stocks, Visa has more consistency in its dividend policy and is better at growing its dividend through a longer period. I would say that at this point in time, Visa is the better credit card company.

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.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.

Image courtesy of David Castillo Dominici - FreeDigitalPhotos.net