Despite all the hype about next-generation payment-processing solutions; like bitcoin and Apple Pay, credit and debit card companies are still growing at a healthy pace.
Revenues indicate that the volume of transactions at all the major payment processors is growing. All the new payment-processing technologies such as Venmo and Android Pay seem to be driving more business to the major credit card brands.
MasterCard (NYSE: MA) saw its revenues increase by $216 million during first quarter 2016; rising from $9.667 billion to $9.883 billion. Visa (NYSE: V)’s revenues increased by $220 million during the same period; rising from $14.06 billion to $14.28 billion.
Even American Express (NYSE: AXP); which is regarded as a basket case by some investors, saw its revenues grow slightly from $32.82 to $32.96 billion during the first quarter an increase of $14 million. Discover Financial (NYSE: DFS) also recorded a slight increase of $53 million rising from $8.739 billion in fourth quarter 2015 to $8.792 billion at the end of first quarter 2016.
New Technology presents New Opportunities for Credit Card Companies
The growth appears to be organic because of its slow pace, but it is steady. My guess is that is driven by the growing number of tools that allow customers to access credit or debit card balances. These include gift cards, preloaded debit and credit cards, digital wallets like PayPal and Apple Pay and online payment solutions such as Bitcoin.
It is easier than ever to use a debit or credit card you do not even need a bank account; or a good credit score, to use a preloaded card or a gift card. BitPay now offers a Visa debit card that can be loaded with bitcoins. The German payment processor Wirecard AG (ETR: WDI) is offering a payment app called boon; that allows users to access a MasterCard balance through Apple Pay or Android Pay.
This provides new sources of revenue for the card companies because they can charge a fee on every transaction made through such instruments. If they can people to access credit card balances through Apple Pay or Android Pay they can still charge interest and late fees which generate floats.
Are Visa and MasterCard Making Money?
Okay that’s the hype, but value investors will ask: “are the big credit companies making money.” To answer this question we’ll look at just the major players, since I’ve dissected the others in earlier blog posts.
MasterCard is making money: it reported a net income of $3.747 billion on March 31, 2016, that number fell slightly from $3.808 billion in December 2015. Visa reported a net income of $6.857 billion in the first quarter; that grew slightly from $6.7 billion in December 2015.
It is easy to see where that income came from Visa reported a profit margin of 47.08% during the first quarter. MasterCard reported a profit margin of 39.21% during the same period.
Visa and MasterCard have a Lot of Float
That looks good, but value investors should ask how much float do these companies have? The answer to that question is quite a bit; MasterCard reported having $933 million free cash flow on March 31 and Visa reported $716 million.
What is more interesting from a value investment is the amount of cash these companies have. The financial numbers indicate that both of the Big Two credit card brands are swimming in cash.
More importantly, MasterCard reported generating $4.14 billion in cash from operations during the first quarter; up slightly from $4.034 billion at the end of 2015. Visa generated $6.664 billion in cash from operations during the first quarter, down slightly from $6.802 billion in December 2015.
The two companies also have a lot of money in the bank. Visa reported having $19.9 billion in cash and short-term investments on March 31, 2016. MasterCard had $6.208 billion in the bank on the same day.
Interestingly enough, Visa’s cash and short term investments fell during the first quarter dropping from $21.34 billion to $19.9 billion. MasterCard also had less in the bank its cash stash fell from $6.738 billion in December to $6.208 billion in March.
Despite the drops, both companies have a lot of float. I classify both Visa and MasterCard as value investments, because of the amount of cash they have in the bank.
Are Visa and MasterCard good investments?
Visa and MasterCard are good value investments; because of the high level of float and the growth potential. They also offers investors a modest dividend, MasterCard offered a dividend yield of .73% and Visa a dividend yield of .67%, which is low; but steady.
Something to remember here; is that the dividend from these companies is safe under current conditions. Neither of these companies is going to start losing money, or stop paying its dividend anytime soon.
Therefore; both Visa and MasterCard are good widows and orphans stocks to hold in your portfolio on a long-term basis; because of the low risk, steady dividend and high-growth potential. Visa stockholders received a 23.59% return on equity, and MasterCard owners were rewarded with a 61.47% return on equity in May 2016.
Investors need to be involved in the payment processing industry, because of the rate at which is growing. New technology is driving growth in this sector and making some great value stocks, even more valuable. If you want your portfolio to grow; you need to invest in payment processors, of which Visa and MasterCard are the safest bets for steady growth.