In the world of investing, perhaps no two companies appear to be as fundamentally similar as American credit card giants Mastercard Inc (NYSE:MA) and Visa Inc (NYSE: V). Both companies have very similar five-year stock price appreciation growth rates (230% and 220%, respectively). They have similar dividend yields (0.6% and 0.7%, respectively) and valuation TTM P/E multiples (35 and 41, respectively). And they have similar market capitalizations ($160 billion and $253 billion, respectively).
Comparing these two companies helps identify strengths and weaknesses in both. In the wake of earnings results, which beat expectations for both companies, this is especially useful for investors deciding which company to take a position in. I’ll take a long-term view with both firms, looking at the fundamental growth drivers for each and highlighting key aspects of each company’s business model for investors interested in the consumer spending sector.
Mastercard’s Costs Outpacing Revenue
Mastercard, which just reported earnings this week, continues to impress investors. It’s posting very strong double-digit top- and bottom-line numbers. These numbers are supported by much higher growth rates in most of the company’s international markets compared to relatively slow domestic growth. Mastercard’s appeal to many investors has been the company’s diverse portfolio of markets. This spreads out much of the company’s idiosyncratic risk across a number of emerging markets. And these markets carry far greater long-term growth potential than mature markets in North America.
That said, I have a hesitation with Mastercard. It has impressive growth rates and the ability to return substantial value to shareholders each and every quarter. But Mastercard’s operating costs have been increasing at a faster rate than revenues. This leads to a slight decline in operating margin. That’s one of the key fundamental factors I look to with credit card companies. Operating margin is one of the easiest and cleanest metrics to assess for a company in the consumer credit space. Strength within consumer spending and the broader global economy has a very high correlation to the operating margin of companies such as Mastercard and Visa. Just take a look at the company’s operating margin over the past 10 years.
Visa and Mastercard’s Low Dividend Yields
Both Mastercard and Visa likely have experienced lower investor demand for their shares because they have very low dividend yields. This is more than offset, however, for investors considering total distribution to shareholders. One of the key drivers behind Mastercard’s impressive share price appreciation over the past five years (more than tripling) is the company’s massive share buy-back program. The program has continued to result in continued reductions in terms of shares outstanding in recent years.
Since the beginning of the year, Mastercard has returned more than $2.5 billion to shareholders in the form of share buy-backs. That compares to $700 million in dividend payments. Combining the two amounts, we can see that an investor’s total yield from distributions increases to 2% ($3.2 billion divided by the company’s market capitalization of $159 billion) from a measly 0.6% dividend yield. That’s a much more attractive yield for long-term, income-focused investors.
Visa Beats Mastercard on Several Fronts
Visa is the larger brother of Mastercard. It has a bigger chunk of overall global market share. And it has a strong pipeline of innovative products and services ready to take it to the next level. Therefore, it’s understandable why Visa has maintained a positive valuation multiple variance compared to Mastercard.
Visa’s gross margin as a percentage of revenue is forecasted to continue to fall in the high-60% range. Its forward P/E of 23 reflects a significant amount of earnings growth compared to its TTM P/E of 41. Two innovative services, “mVisa” and “Visa Direct,” stand to continue to provide above-average healthy growth for decades to come. Visa’s integrated relationships with customers and suppliers, along with an incentive program considered one of the best in the industry, makes Visa appear fairly valued at its current state.
Chris MacDonald has no position in any stocks mentioned in this article.