Where to Look Instead
Still, because the U.S. financial sector is the world’s largest and most sophisticated, it does offer investing options that aren’t exposed to credit risk in the financial system. You can find companies that have better visibility of earnings in the current environment, like Visa (NYSE:V) and MasterCard (NYSE:MA). Both have no debt — a fact that investors who’ve looked at any bank’s balance sheet will greatly appreciate. Both have healthy operating margins of 52.26% and 60.18%, respectively.
MasterCard and Visa are also different because they’re more like technology companies that facilitate commerce and don’t worry about consumers’ ability to pay their credit cards bills — that’s the issuing banks’ problem (of course, they’re also vulnerable to bad publicity when hackers get hold of cardholder data).
Only 15% of global retail transactions are done with credit or debit cards. This number is much higher in the U.S., at 48%, but there’s still lots of room for growth both at home and abroad. Visa now controls 39% of U.S. credit card volume, while MasterCard controls 23%.
Still, the environment is virtually the same for both companies, as valuation and recent performance typically become the factors to consider more seriously for choosing either V or MA from a shorter-term perspective.
Electronic transactions are likely to keep increasing in popularity, especially in faster-growing emerging markets with lower penetration rates. In 2011, worldwide spending on MasterCard- and Maestro-branded cards rose 16% to $863 billion, and spending by consumers outside their home countries climbed 18%. Outrageous, barely legal bid/ask spreads at foreign-exchange bureaus in airports are no longer an issue because MasterCard FX transactions are now done using market rates, increasing the appeal of using plastic abroad.
New regulatory developments in 2011 have leveled the playing field between Visa and MasterCard (issuing banks can can no longer force merchants to use one or the other). MasterCard’s management has decided that the business has enough cash-generating capacity to double the quarterly dividend to 30 cents a share. The annual dividend is small in percentage terms given the share price, but so is the single-digit payout ratio, indicating that in time the dividend has room to go higher.
Due to the settlement of a litigation issue, MasterCard’s 2011 profits grew only 3%. But given the 21% surge in net revenuesto $6.71 billion, its overall earnings picture is healthy. For 2012 and 2013, management is looking at a compound annual growth rate of 12% to 14% for revenues and a 20% rate for earnings per share.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates holds positions in the Financial SPDR (XLF), Mizuho Financial, MasterCard, and Visa for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the above mentioned securities.