Should I Buy Visa or Mastercard Stock?
Mastercard and Visa effectively have a duopoly on debit and credit card payment processing around the world. But which could be the better fit for your portfolio? In this article, we compare Mastercard vs Visa stock and examine the question ‘should I buy Visa or Mastercard stock?”
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Visa and Mastercard
Visa and Mastercard are two companies which need little introduction. In fact, with more than 7 billion cards issued between them worldwide, chances are most readers have either one or the other sitting in their wallet.
Both companies operate in the electronic payments industry, which it dominates. However, unlike its closest rivals, such as American Express and Discover, neither Visa nor Mastercard issue their own cards or extend credit to cardholders.
Instead, cards are issued by third party banks and credit providers, with Visa and Mastercard providing the payment processing network through which the payments travel.
Every time a card payment travels through either company’s vast network, they charge a fee. This means Visa and Mastercard generate revenue from card payments without being exposed to the risk involved in extending credit to consumers.
So, Mastercard vs Visa, which stock is the better investment? With both companies appearing to have an almost identical business model, how can one decide between the two? Let’s start by examining each company in a bit more detail before turning to the question of “should I buy Visa or Mastercard stock”.
Investing in Visa
Of the two companies, Visa traces its origins back further and is the larger, both in terms of market capitalisation and revenue.
In the full year ended 30 September 2023, Visa generated net revenue of $32.7 billion, with operating income of $21 billion. That’s an operating margin of 64%. For those unfamiliar with the term, operating margin measures operating income as a percentage of revenue and, to be clear, 64% is high.
High margins are a recurring theme for Visa. In 2021 and 2022, the payment processor reported operating margins of 66% and 64% respectively. Why the high margins?
Visa invested a lot of money over the years constructing and expanding its payment processing network around the globe. However, once built, the network is inexpensive to maintain, meaning that Visa’s past investments have facilitated today’s high margins.
Visa generates a lot of cash from its operating activities, and uses some of this cash to pay dividends. At the time of writing, it has a dividend yield of 0.7% and has increased its annual dividend for 15 consecutive years.
However, more of this cash is allocated to repurchasing shares, having repurchased 55.4 million shares of its Class A common stock in the fiscal year 2023. Over the past decade, the number of Visa’s outstanding shares have declined by 20%.
Investing in Mastercard
Slightly younger and smaller, Mastercard makes up the other half of the global duopoly on payment processing. But investors shouldn’t necessarily discount it on account of its smaller size. In fact, for many investors, this is somewhat of an attraction, as it suggests the company has more room for future growth.
In the full year ended 31 December 2023, Mastercard generated $25.1 billion in net revenue and reported operating income of $14 billion. This represents an operating margin of 56%.
This isn’t quite as high Visa but it is still high and, like Visa, this is not merely a one-off. In 2021 and 2022, Mastercard reported an operating margin of 53% and 55% respectively. No need to explain again why this is the case. It’s the same as Visa. Both companies are reaping the rewards of earlier investments.
Mastercard also generates lots of cash from its operating activities and uses some of this cash to pay dividends and repurchase shares.
At the time of writing, Mastercard has a dividend yield of 0.5% and has increased or maintained dividend payments every year for the last 16 years. In 2023, Mastercard repurchased 23.8 million shares of its common stock and, over the last decade, its number of shares outstanding have fallen by 19%.
Visa vs Mastercard
Looking at these two companies, they both have an awful lot in common.
Both are payment processors. Both have a global presence with billions of cards in circulation. Both operate high margin businesses. Both have a history of rewarding shareholders through dividends and share buybacks. Both have outperformed the wider market since their stock market debut. And both should continue to benefit from a general shift away from cash as a payment method.
So, how to separate the two? In terms of investing, what is the difference between Visa and Mastercard?
A key difference is where the two companies generate their revenue. Let’s take a look at the total payments volume of both companies for the quarter ended 31 March 2024.
Source: Mastercard and Visa – Quarterly Earnings.
The point we are trying to convey is probably more easily understood in the infographic below.
Whilst the United States is the largest single market for both Visa and Mastercard, it’s Visa which relies most heavily on the US for its revenue. On the other hand, Mastercard has significantly higher exposure to the international market.
Should I Buy Visa or Mastercard Stock?
Although both companies tend to generate reliable revenue throughout all stages of the economic cycle, they undoubtedly benefit from a growing economy and a strong consumer.
Due to where each company generates its revenue, between the two, Visa is likely to benefit more from a growing US economy, whereas Mastercard is likely to benefit more from a growing global economy.
Consequently, for those who feel bullish on the US economy in comparison to the global economy, Visa may be the better option. Conversely, if investors feel the opposite, then Mastercard could be the right fit.
However, this also means that maybe it isn’t a case of Visa or Mastercard after all. As each company provides exposure to different areas, there is potentially an argument to be made for investors to include both Visa and Mastercard in their portfolios. Indeed, many do.
Nevertheless, before deciding whether to invest in either company, it is important to weigh the potential risks. Although both companies may be considered examples of defensive stocks, it is likely that they would still be negatively impacted by an economic downturn.
A recession typically results in a drop in consumption and, given how both Mastercard and Visa generate revenue, this would likely lead to a fall in earnings, which could have a knock-on negative impact on share price.
Investing in Visa and Mastercard
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FAQ
Which stock is better Visa or Mastercard?
The answer to this question will largely depend on the individual investor and their investment goals.
Although the two companies are very similar, Visa is more exposed to the US market than Mastercard, which has higher international exposure. Consequently, if investors are more confident about the outlook of the US economy in comparison to the global economy, they may decide Visa is the better option. The opposite is also true.
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