During recessionary or stagnant times, financial institutions generally don’t do well. But it’s almost the opposite scenario in the payment-services industry.
- Mastercard Inc (NYSE:MA)
For instance, despite the sovereign debt crisis in Europe, shares of Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) appreciated by 38% and 22.5%, respectively, last year. Now that the major economies around the world are showing signs of recovery, I believe that there is still a significant upside in store for both Visa and MasterCard, despite their high valuations.
Passing the buck
In a bid to lure more merchants, Visa Inc (NYSE:V) and MasterCard recently allowed US retailers to pass on transaction charges generally reserved for merchants to customers. This will certainly boost Mastercard Inc (NYSE:MA) and Visa’s acceptance among US retailers and should offset any decline in credit card usage. According to recent data, credit card checkout fees are as follows:
| Company | Fee |
|---|---|
| Visa Inc (NYSE:V) | 1.9% |
| Mastercard Inc (NYSE:MA) | 1.8% |
| Diner’s Club | 4% |
| American Express (NYSE:AXP) | 2.9% |
American Express Company (NYSE:AXP) has not yet allowed changes to the surcharge, and I don’t see it coming either. American Express provides services to the rich, a demographic that often makes huge transactions. Besides the hefty $450 annual fee, passing along a 2.9% surcharge on big transactions could gravely affect the company’s credit card usage and put pressure on the company to boost its rewards program.
But the surcharge fees imposed by Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) are relatively smaller, and many retailers have already decided not to pass the fee along. This move comes as a bid to promote customer loyalty, but merchants are basically now free to pass the buck.
Investors delight
Visa has a $1.75 billion share repurchase program underway of which $1.1 billion remains. At the current market price, this translates to a pending repurchase of 6.9 million shares. Moreover, Visa pays out 27.5% of its earnings as dividends, and the current share buyback should reduce its dividend payouts by a tad over 1%.
Mastercard Inc (NYSE:MA) recently increased its share buyback program to $2 billion. Its previous buyback program of $1.5 billion has pending capital of $440 million, and the new plan will spring into action as soon as the previous $1.5 billion is exhausted. Its board also doubled the company’s quarterly dividend payouts, and the CMP shares of MasterCard yield approximately 0.5%.
Pending growth
Visa and MasterCard have been reporting stellar financial performance. There are absolutely no signs pointing toward a slowdown, especially since both of the companies are rapidly deploying their respective mobile-payment systems using Near Field Communication (NFC). Mobile payment systems make retail payments more flexible, easier and safer than credit cards, and should be met with increased credit servicing.
As a strategic move, Visa Inc (NYSE:V) has teamed up with Samsung to ensure a rapid deployment. As per the agreement, Visa’s payWave app will come pre-installed in Samsung’s NFC capable devices, beginning with Samsung Galaxy S4.
MasterCard also recently introduced its mobile payment solution, MasterPass, which is an evolution of PayPass. It should be noted that these payment solutions will be accepted by both retail merchants and financial institutions, which could very well threaten the dominance of eBay Inc (NASDAQ:EBAY)’s PayPal.
These deployments have just begun, and yet a report by ABI Research suggests that nearly 1.95 billion NFC capable devices will be shipped around the globe in 2017 alone. This leaves ample growth potential for both Visa Inc (NYSE:V) and MasterCard.
Wrap up
Both MasterCard and Visa have low yields because their shares have risen by 146% and 179%, respectively, over the last 5 years. Repurchasing shares while companies are delivering spectacular results only displays the faith and confidence of their respective board members. Shares of Visa and Mastercard Inc (NYSE:MA) trade at forward earnings multiples of 18.5x and 17x, which indicates that shares are fairly valued but by no means overvalued. Both Visa Inc (NYSE:V) and MasterCard have their share of positive triggers and thus deserve a buy rating.
The article 3 Compelling Reasons to Buy These Credit Card Stocks originally appeared on Fool.com and is written by Piyush Arora.
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