Basic Needs Portfolio Selection: Mastercard Inc (MA)

Four weeks ago, I outlined my plans to create a portfolio of 10 companies that all have one thing in common: They provide a basic need or deliver life’s necessities. It’s my contention that basic-needs companies can offer investors stability and growth throughout any market environment thanks to consistent demand, incredible pricing power, and delectable dividends. This portfolio, which I have dubbed the Basic Needs Portfolio, will be pitted against the S&P 500 over a period of three years with the expectations of outperformance for all 10 stocks. I’ll be rolling out a new selection to this portfolio every week for the next six weeks.

You can review my previous three selections here:

—Waste Management

—Intel

—NextEra Energy

Today, I plan to introduce the fourth of 10 selections to the Basic Needs Portfolio: Mastercard Inc (NYSE:MA).

How it fits with our theme
I fully expect MasterCard to be a bit of a head-scratcher at first for most investors since financial companies tend to be some of the most susceptible to economic downswings. As is usually the case in a recession, banks see their deposits and loan generations slow, while financial service and brokerage companies often derive less service revenue. On the surface, that isn’t exactly a confidence boost for a credit service company like MasterCard. But, I plan to prove that theory dead wrong.

In fact, Mastercard Inc (NYSE:MA) and its peer Visa Inc (NYSE:V) are possibly the only two near-perfect financial companies to take advantage of in any economic environment. When the economy is booming, consumers are certainly more apt to break out their credit card. Conversely, barring a depression, consumers are also likely to turn to credit in order to facilitate their basic needs purchases through tough times. Aside from an exceptionally small downward blip between 1990 and 1993 and a two-year drop of about 6% during the most recent recession, total consumer credit levels have been on a steady incline over the past 70 years, rising from $5 billion in 1943 to more than $2.8 trillion in June 2013, according to data from the Federal Reserve.

Source: St. Louis Federal Reserve.

The most important aspect about MasterCard and Visa is that they’re nothing more than payment processing facilitators. This means they don’t actually lend the money out — they merely act as the middleman between the vendor and the credit company or bank that provides the “loan” to the consumer — which completely protects them from credit defaults. If that’s not the perfect basic-needs scenario, I’m not sure what is!

The risk
I’ve said it before, and I’ll say it again; there is no such thing as a riskless investment! Even MasterCard and Visa bear some risk. For Mastercard Inc (NYSE:MA), the two greatest risks it’ll face are the potential for a global depression and increasing levels of competition.