Payment processing firms Visa (V) and MasterCard (MA) are two of the largest credit card companies in the world. Between them, the duopoly accounts for a whopping 64 percent of the global consumer financing market, with almost half of all Americans owning at least one Visa card in 2020 alone.
In addition to their dominance of the industry, the companies have also been kind to investors over the years. Since going public in 2008, Visa’s stock has grown 1,280 percent, while MasterCard – which floated a little earlier in 2006 – has delivered returns to shareholders of over 7,740 percent since then.
Such is the power of these two brands, that the firms are now almost synonymous with the concept of credit card usage as a whole. But given the relative parity that exists among the pair, you might be forgiven for thinking that any differences separating the businesses would be paper thin. Indeed, the companies do match up pretty closely on many major barometers of success.
For instance, both companies are growing their annual revenues at around 25 percent a piece, while their profitability fraction – or gross margin – is about the same, at just under 100 percent for each.
In fact, their price action so far this year is almost identical. Visa and Mastercard have been in lockstep.
However, to suggest that the two companies are merely financial doppelgangers of one another would be to misrepresent reality. One of these businesses has some excellent opportunities for growth going forward, while the other faces some stubborn headwinds that could derail its near-term prospects.
Moreover, there also appears to be a “killer metric” that distinguishes between these mega-firms even further – and one that’s particularly pertinent for potential investors too.
Let’s take a look at each company, then assess which one of the two makes for a better investment choice at the present time.
Visa is a truly global company. It has operations in more than 200 countries, services 3.3 billion credit cards, and delivers innovative and secure solutions to over 15,000 financial institutions worldwide.
The firm is slightly larger than its arch-rival MasterCard, with a market cap of $420 billion versus MA’s $336 billion. Importantly, Visa takes the lion’s share of worldwide general purpose credit card transactions at 40.2 percent, allowing the firm to rake in revenues of $7.2 billion in the Second Quarter 2022.
Not surprisingly, Visa also runs the world’s most expansive payment system, VisaNet, which authorizes and processes fast and reliable payment settlements between cardholders, merchants and banks. The technology behind VisaNet is the jewel in the company’s crown, helping to seamlessly integrate the 65,000 transaction messages
sent across its platform every second.
Furthermore, thanks to the positive network effects that being the biggest player in the payments processing sector brings, V is also able to easily scale up its operations wherever the opportunity abounds.
Indeed, its asset-light business structure means its expenses are tightly fixed, giving the firm a high margin on any further upside it generates from future initiatives.
And there are quite a few growth opportunities for the company too. It’s recently partnered with digital currency platform Coinbase (COIN)
to offer a number of crypto services
, and is looking to benefit from some post-COVID specific tailwinds, such as increased international travel and rising consumer activity.
Visa had a solid fiscal year in 2021. The company grew its net revenues 10 percent
to $24.1 billion, while also raising its annual cash dividend to $1.50. Moreover, judging by the success of its First Quarter 2022 report, the company looks on track for even better gains this year, with net income up 11 percent, and a new share repurchase program
authorized to the tune of $12 billion.
Unlike many other major digital payment companies, MasterCard doesn’t actually extend its own credit or issue its own cards. Instead, the firm makes most of its money from service and processing fees, leaving its partner institutions to underwrite the credit contracts themselves.
This set-up helps MA to de-risk its exposure to bad customers, and simply focus on providing its best product to users.
That said, not all risks are so easily managed. One of the principal headwinds to have fomented recently for MasterCard was the suspension of its operations in Russia
, a market that Michael Miebach, the firm’s CEO, described as a “substantial and important” part of its business.
However, there is some welcome news for MasterCard when it comes to the company’s recent financial results. The business increased its First Quarter gross dollar volume by 17 percent
, and expects its net revenue CAGR to be in the high-teens between now and 2024.
Despite this, MA is a much more expensive valuation proposition than its rival competitor. For example, MasterCard’s price-to-sales multiple is high at 26x, while V’s is relatively cheap at just 17x.
The “Killer Metric”
As you can see, there are certainly differences between the two companies. Visa appears to be growing its net revenues on a quarter-by-quarter basis, with a number of potential growth opportunities on the horizon too. MasterCard, by contrast, lost one of its most important markets, and its valuation leaves a lot to be desired.
But is there anything else that could separate these businesses in the minds of investors?
As far as dividends go, Visa and MasterCard each offer a very low yield of 0.70 and 0.54 percent respectively. This might not be particularly enticing for income investors looking for something a little more substantial, but the seemingly diminished yields are compensated by an attractive payout ratio of around 20 percent for both companies. Moreover, their dividend per share growth rate is also excellent, with Visa’s at 9.66 percent, and MasterCard’s marginally higher at 9.68 percent.
Perhaps the most interesting distinction between the two brands is the Return on Common Equity (ROCE) ratio that each company sports. A large ROCE indicates that a business is generating big profits from the investments it’s making with its equity capital.
As such, both Visa and MasterCard each have high ROCE ratios. Visa’s ROCE of 40.0 percent is considered good, but MasterCard truly excels with its ROCE of 142.1 percent.
This “killer metric” is especially important for mature businesses like V and MA, because it’s such a good indication of whether or not a firm is likely to raise its dividend payout in the future.
Given that both companies have very safe dividends – but have also been lacking in capital appreciation recently – MasterCard’s superior ROCE might prove the key difference for potential investors. And if you can overlook MA’s near-term headwinds, its long-term cash distribution prospects could be the catalyst that finally convinces you to buy.
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