Although 70 years is certainly a long enough timeline to establish that consumer credit usage only tends to go up, a very deep recession or perhaps even a depression could be enough to get consumers to holster their credit cards altogether. In addition, deep recessions have a way of harming consumers’ credit to the point where they don’t have access to a credit card, or in some cases, even a bank card. This is one reason we’ve seen such a proliferation of prepaid debit cards over the past couple of years. Green Dot Corporation (NYSE:GDOT), for example, has been largely successful in wooing prepaid consumers through its partnership with Wal-Mart Stores, Inc. (NYSE:WMT). If consumer credit quality struggles, prepaid cards could be turned to in even greater numbers, which would be great for Green Dot, and not nearly as good for MasterCard.
Source: Pixabay.
Competition is another concern for MasterCard. American Express Company (NYSE:AXP) and Discover Financial Services (NYSE:DFS) are payment facilitators as well, but they also double as lenders. AMEX and Discover’s ability to double-dip as processor and lender allows these companies superior margins to MasterCard and Visa when times are good. However, when a recession rolls around, both AMEX and Discover can succumb to the liability of default associated with being a lender.
Why MasterCard?
Despite the risks, and the assumption that financial companies would make a nightmare long-term hold through tough financial times, I feel Mastercard Inc (NYSE:MA) represents everything the basic needs portfolio is seeking.
First, MasterCard is part of a steadily rising trend of credit card usage thanks in part to record low lending rates in the U.S. and low lending rates in many other parts of the world. What you have to understand is that credit usage isn’t just being defined as “within the U.S.” There is literally a world of opportunity out there for MasterCard to penetrate. According to its CFO Martina Hund-Mejean, 85% of all global transactions are still done in cash, leaving what could be decades of double-digit growth opportunities for MasterCard and Visa.
Emerging market nations represent a particularly strong growth opportunity for MasterCard because these countries can grow independent of many developed regions like North America and Western Europe. That means a global slowdown in developed nations isn’t likely to slow growth in emerging markets and should translate to increased payment volumes for MasterCard.
MasterCard is also extremely well financed, which is the primary factor that coerced me to select it over its rival Visa. MasterCard ended its most recent quarter with better than $40 in cash per share ($5 billion), which equates to about 7% of its current market value. By comparison, Visa ended its latest quarter with $4.18 in cash per share ($2.7 billion), or about 2.3% of its market value. I see MasterCard being better able to return cash to shareholders through share buybacks and dividends at a faster rate than Visa despite Visa’s size advantage. MasterCard actually doubled its quarterly payout to investors earlier this year to $0.60 per share from $0.30, although the yield is a mere 0.4% thanks to strong share price appreciation since 2009.
Mastercard Inc (NYSE:MA) will likely be the slouch in the dividend department of this portfolio, but I’ll gladly take it if transaction volume growth remains in the double-digits and U.S. consumer credit card usage continues to climb.
Stay tuned next week, when I’ll unveil the fifth selection to the Basic Needs Portfolio.
The article Basic Needs Portfolio Selection: MasterCard originally appeared on Fool.com.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends, MasterCard. It also recommends American Express and Visa.
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