Looks like Wal-Mart Stores, Inc. (WMT) and Visa Inc (V) are at each other’s throats again, as Walmart is suing Visa over its security policies. But does this have any short-term effect on Visa stock? I think not.
Long story made short, WMT wants to require a pin number for transactions with a debit card — which is standard security practice in most of the world — but Visa is insisting that Walmart rely instead on a customer’s signature.
This isn’t the first time these two have butted heads. WMT sued Visa two years ago over what it considered to be excessively high swipe fees, and Walmart wasn’t the only retailer to sue over swipe fees (there was actually a separate class-action lawsuit, but WMT opted to sue independently).
What WMT Lawsuit Means for Visa Stock
It might seem a little odd that Visa and Walmart can’t get along. After all, you might think that the world’s largest credit card payment system and the world’s largest retailer would be natural allies. But with retail getting increasingly cutthroat, both have a lot to lose.
Let’s take a look at the factors involved.
To start, cash is slowly disappearing from the marketplace. In the United States, only about 35% of transactions are settled in cash or with a check. Most of the rest was settled with credit and debit cards. Internationally, and particularly in developing countries, cash makes up a much larger piece of the pie. But the trend is clear: With every passing year, fewer transactions are settled in cash.
That’s been great for consumers. But it’s been expensive for retailers, who generally opt to eat the 2% to 3% swipe fees rather than pass the cost on to consumers.
In a booming economy, no one really worries about the swipe fees. But GDP growth has been crawling along since 2008, and consumers still haven’t returned to their pre-crisis spendthrift ways. Adding to this is the emergence of cheap internet retailers like Amazon.com, Inc. (AMZN) offering discounted (or free) shipping, and you can see why retailers are feeling the pinch and pushing back on credit card companies.
Walmart’s suit over Visa’s security policies is just the next chapter. Currently, banks are responsible for fraudulent purchases, and not the cardholder or retailer. But that is starting to shift.
Already, retailers that do not have chip-reading terminals (relying on the old magnetic strip reader instead) can be liable for fraudulent charges. With the burden slowly shifting from banks to retailers, you can understand Walmart trying to get ahead of the game and set the security rules.
But what does any of this mean for Visa stock or WMT stock?
Immediately, not much. Shareholders of Visa stock will continue to benefit from one of the great macro trends of our time, the shift to a cash-free society. Visa and rival Mastercard Inc (MA) have new competition — everything from Paypal Holdings Inc (PYPL) to Apple Inc. (AAPL) — but a rising tide lifts all boats. The Walmart lawsuit is a minor bump in the road and nothing more.
Visa stock isn’t particularly cheap, trading hands at 24 times forward earnings. But for a stock 65% operating margins and a return on equity of 23%, that’s not unreasonable.
Now, let’s look at Walmart stock. WMT has had a rough time of it in recent years, and its stock price hasn’t budged in four years. And the macro issues plaguing the company — everything from tapped-out consumers to relentless competition from Amazon — don’t look to be going away any time soon.
That said, Walmart stock is reasonably cheap at current prices, trading at 15 times earnings and 0.45 times sales. It also yields a respectable 3% in dividends. So, in an expensive stock market, a relatively cheap stock like WMT might not be the worst play.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long WMT.
