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Credit Card Companies: Poised To Continue Their Charge

In true oligopolistic fashion, the credit card industry is dominated by just four players:  Visa (V), MasterCard (MA), American Express (AXP) and Discover (DFS). For instance, here’s a look at the respective market shares over the 2006 to 2012 period:

In rough numbers Visa controls 45% of the market, American Express takes just over 25%, MasterCard manages just less than 25% and Discover has stayed consistent with about 5% of the network purchase volume. For those doing the quick math, it’s apparent that these four companies effectively are the market – if you want to use a credit card, these are your options. In turn, these companies act as toll collectors between merchants and consumers.

Of course there is a plethora of regulation and ligation risks, but take a trip to nearly any place of business and it’s easy to see why the credit card companies make money. Furthermore, while we know these charge cards to be almost ubiquitous, this does not necessarily hold in the rest of world. Indeed, according to MasterCard’s most recent annual report roughly 85% of worldwide transactions are conducted in cash. This would seemingly indicate that there is plenty of room for each company to grow - even if the respective market shares don’t shake up at all, there could literally be four winners in this globally-expanding base.
With that general growth thesis in mind, we thought that it would be enlightening to take a look at the particular business dynamics of each company through the lens of F.A.S.T. Graphs™.


This San Francisco based global payments giant is by far the runaway leader in credit card volume market share. Visa provides services in more than 200 countries and territories, enabling consumers to use digital currency instead of cash and checks.  Capable of handling more than 24,000 transactions per second (that’s over 2 billion a day) Visa does not actually issue cards, extend credit or set rates and fees – instead, the company collects fees from financial institutions based on volume. Interestingly, only about 30% of Visa’s payment transactions are credit, while the remaining 70% is derived from debit and prepaid cards.

Morningstar analyst Jim Sinegal describes Visa’s moat in the following way:

“A powerful network effect is responsible for Visa’s wide economic moat. A trusted brand is important to users of payments systems, and Visa has spent billions of dollars over decades on this intangible asset.”

As a result the business has been steadily growing and shareholders have been continuously rewarded. Over the past 6 years Visa has grown operating earnings per share (orange line) by over 24% a year. In addition, the dividend (pink line) has grown at an even quicker pace jumping from $0.10 a share in 2008 to today’s mark of $1.60 a share. Still, the payout ratio remains quite low at just 18% of next year’s projected earnings, with a current dividend yield of 0.7%. Further, notice that current price-to-earnings ratio stands at about 27.9 versus a normal P/E ratio of about 22.1 during this time period.

Given this strong operating history, one might expect especially strong performance results as well. And this is precisely what we see: shares of Visa increased at a yearly rate of 25% from 2008 until the end of 2013 – crushing the 6.9% mark put up by the S&P 500 index. Note that the vast majority of these returns were derived from the capital appreciation component of the total return equation.

Finally, while it is important to understand the past operating history of a company, it is paramount to consider a company’s future prospects. Thirty-four analysts reporting to Standard & Poor’s Capital IQ come to a consensus estimated earnings growth rate of 19.4% for the intermediate-term. If – in 5-years time – Visa is trading at 15 times earnings, this would equate to a 12.4% annual 5-year estimated total return. In order for Visa’s stock to mirror business results over time, Visa would have to trade closer to its current valuation.


Purchase, New York based MasterCard considers itself to be a technology company rather than a credit card company. Just like Visa, MasterCard doesn’t issue cards, set interest rates or establish annual fees – instead, the company makes money as a payment processor.  There are over 1.9 billion MasterCards in existence, which can be used at over 35.9 million locations in more than 210 countries and territories. Last year alone, $3.6 trillion was spent using MasterCard, with the company processing 65,000 transactions every minute.

Much like Visa, MasterCard develops its moat in the form of wide use and acceptance. The more people who have it and the more merchants who accept it, the stronger the moat becomes. Over the past 8 years MasterCard has grown operating earnings by an impressive 29% a year. In addition, MasterCard recently announced a 10-for-1 stocks spilt, an 83% increase in the quarterly dividend and a new $3.5 billion repurchase program.  Despite these moves, MasterCard is still only paying out about 15% of its expected profits with a current dividend yield of 0.5%.

Coupled with the quick operating earnings growth rate, investors during this time period fared extremely well – receiving a compound annual return over 47%. A hypothetical $10,000 investment in 2006 would now be worth over $180,000.

But as we know, past performance alone does not dictate future prospects. Thirty-four analysts reporting to Standard & Poor’s Capital IQ come to a consensus earnings growth rate of 18.6% for MasterCard in the intermediate term. If MasterCard were to trade at 15 times earnings in the future, this would equate to a 5-year estimated annual total return of 8.7%. If MasterCard were to trade its current valuation in the future, the performance results would likely track the business results over the long-term.

American Express 

Long a Warren Buffett favorite, this New York based global services company operates a bit differently than Visa and MasterCard. American Express does, in fact, issue credit cards, and as such, commands the title of world’s largest card issuer. American Express has a horizontal scale across the payment system, with over 100 million cards-in-force generating $31 billion in annual revenue off of $888 billion in annual purchase volume.

American Express tends to focus on the affluent, which appeals to merchants deciding whether or not to carry certain cards. Because of American Express’ “closed-loop” network card approach, the company has an enormous amount of consumer spending data available and might be able to leverage this aspect further in the future.

Over the last decade and a half American Express has been able to grow operating earnings by about 7.7% a year, while the dividend has grown in near lock-step with overall earnings. Note the precipitous decline in earnings during the most recent financial crisis, as American Express derives some of its business from financial services. Today American Express trades at 18.2 times earnings against a normal P/E ratio of 19.2, with a current dividend yield of 1%.

Given the reasonable annual operating earnings grow of 7.7% - along with similar beginning and ending period valuation – one might expect return results that roughly tracked business results. And this is precisely what happened as American Express shareholders have enjoyed returns of about 7.2% a year including dividends.

Looking forward, 25 analysts come to a consensus estimated earnings growth rate of 10% a year. If American Express is able to reach this target – and trades at 15 times earnings in 5 years – this might indicate a 7.7% yearly estimated return. In order for the performance results of American Express to reflect the business results over the long-term, the future valuation would likely have to come close to the current valuation.


Illinois based Discover bills itself as a financial company and operates in a similar manner to American Express. Jim Sinegal refers to Discover as the “poor man’s American Express” referencing both its closed-loop operation network and its generally middle-class customer base. One in four U.S. households has a Discover card, with last year’s volume coming in at $117 billion. In addition, Discover provides student loans, personal loans, home loans and savings deposit services. Due to its online banking presence, Discover has become a leader in direct consumer banking.

In the past 7-years Discover Financial Services has been able to grow operating earnings by 10.5% per year. However, notice that earnings fell dramatically during the most recent recession as the majority of Discover’s business is banking focused. In turn, the dividend suffered mightily being cut from $0.24 a share in 2008 to just $0.08 a share in 2010. Still, Discover Financial Services was able to increase the dividend from $0.06 a share in 2007 to today’s mark of $0.80. Discover has a current P/E ratio of 11.1 against a normal P/E ratio of 10.9 along with a current dividend yield of 1.5%.

Discover saw negative performance results for the first four years after its IPO, but has since recovered to provide increases in shareholder value that roughly tracked the business results over time. A hypothetical $10,000 investment in 2007 would now be worth about $20,000.

Looking forward, 26 analysts reporting to Standard & Poor’s Capital IQ come to a consensus estimated earnings growth rate of 10% a year – the same projected rate as American Express. However, due to Discover Financial Services’ lower P/E, if it is trading at 15 times earnings in 5-years time this might indicate a 5-year estimated total return of 15.5%.

Below is a summary of the underlying data using the F.A.S.T. Graphs™ Portfolio Review feature. Note that each of these metrics can be found individually on the F.A.S.T. Graphs™ page or collectively in the portfolio review section.

Interestingly, Visa and MasterCard are expected to have much higher growth rates moving forward, yet Discover has a higher 5-year estimated annual total return. Note that this is directly related to each company defaulting to a P/E of 15 in 5-years time. Granted the paradigm shifts if you assign higher multiples, but it’s interesting to note nonetheless.

In sum, within this selection of payment companies, it’s somewhat ironic that American Express is really the only “true” credit card company: Visa and MasterCard do not issue cards, extend credit or set rates, and Discover makes more money from banking than issuing cards. Still, if you use a credit card, it is overwhelmingly likely that your payments are processed by one of these four powerhouse servicers.

As a group it appears that there are a variety of potential catalysts along with risks forthcoming. For instance, it’s easy to see that these companies have an enormous opportunity in the global market as more people transition away from cash-based transactions. In addition, they might just be scratching the surface on consumer data trends. On the other hand, there is always the constant risk of alternative payment methods and enhanced regulation.

Overall it’s up to the individual to determine what an appropriate valuation range might look like and whether or not the current earnings estimates are reasonable. We have found that even though one business might appear superior – with better growth prospects at hand – this does not also have to necessitate that it is the better investment. More succinctly: valuation matters. As always, we recommend that the reader conduct his or her own thorough due diligence.

Disclosure:  Long MA and V at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

This article was written by Chuck Carnevale. If you enjoyed this article, you can read more of his articles here.