In this video, I’m going to analyze both Visa and Mastercard stock, ultimately deciding
which I think is the better investment.
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video.
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at DividendData.com.
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Visa and Mastercard are the duopolies that dominate digital payments.
Despite public perception, these companies do not actually issue cards themselves or
make money via credit card interest.
They don’t bear credit risk with respect to any of these activities.
Instead, they operate the digital payment network that connects consumers, merchants,
financial institutions, businesses, strategic partners, and government entities.
These networks have a dominant market share, creating a huge competitive advantage.
It’s powerful to be supported everywhere and as the network grows, the value provided
by the service increases and it becomes more difficult to compete with.
This network effect gives the companies monopoly like economics and anti-trust concerns from
some governments.
Now, I’m going to analyze each stock individually, then look at the key differences, and at the
end of the video explain which stock I like better.
Visa, ticker symbol V, was founded in 1958 and is the leading digital payment network
both in the United States and Globally.
As the market leader, Visa has the strongest network effect in the industry.
The current stock price is $213.50, which is down 3.5% year to date.
This values the company at $451.8 billion dollars.
The PE ratio based on earnings over the trailing twelve months is 33.58.
Earnings per share have been growing at a high rate, with a small dip during the 2020
lockdowns.
Now Visa’s earnings are growing at a high rate once again.
Revenue per share has grown at a 15% ten-year compound annual growth rate.
The annual revenue per share in the fiscal year 2021 was $11.32, which is an 18 price
to sales ratio.
That may seem very high, but Visa is an extremely high-margin money-making machine.
Free Cash Flow per share is growing at a 20% ten-year CAGR.
In the fiscal year 2021, the company generated $6.82 in annual free cash flow per share.
This is a 31 price to free cash flow ratio.
Visa has amazing growth and this is likely to continue at a high rate, due to tailwinds
we’ll discuss later.
The company's margins are fantastic.
In the fiscal year 2021, their annual gross margin was 80% and the net margin was 50%.
Visa is a money printing machine.
Their business is highly scaleable with very low capital expenditures.
If we look at their cash flow statement, you can see that Capital expenditures have remained
relatively flat in recent years, but free cash flow has continued to grow.
Their scalable digital business requires very little additional investment for growth.
This allows Visa to reward its shareholders via growing dividends and share repurchases.
Every year, the company buys back many billion dollars in shares.
This results in a 1-3% reduction in annual shares outstanding.
Since Visa went public in 2008, they’ve increased its dividend payment every year.
The ten-year compound annual growth rate of the dividend is 24%.
This is very similar across both the 5 and 3-year CAGR.
Their last dividend increase was 17.2%.
I’d expect high dividend growth moving forward.
As a long-term holding, this helps out given their starting dividend yield is only 0.7%.
The payout ratio is 22% and has hovered around this level over the last decade.
As long as growth continues, Visa will have massive dividend growth over the long term.
The company has $35 billion in shareholder equity and $8 billion in net debt.
This is extremely well covered by Visa’s earnings.
Mastercard, ticker symbol MA, was founded in 1966 and is the second largest digital
payment network in the United States and globally.
The current price is $362.33, which is down 2.32% year to date.
This values the company at $355 Billion dollars.
The PE ratio based on earnings over the trailing twelve months is 37.7.
Earnings per share has been growing at a high rate, seeing a similar dip to Visa in 2020.
They are now growing well beyond that dip.
Revenue per share is growing at a 13% ten-year compound annual growth rate.
The company trades at a high price to sales ratio, similar to Visa.
Mastercard is a free cash flow machine, growing its free cash flow per share at a 16% ten-year
CAGR.
Mastercard is trading at a higher premium than Visa, with a 44 price to free cash flow
ratio.
Their annual margins for the fiscal year 2021 were 76% gross margins and 46% net margins.
Similar to Visa, the company has very low capital expenditures.
This means additional growth requires little to no investment, resulting in free cash flow
expansion.
Mastercard also rewards shareholders with large dividend growth and share repurchases.
They spend a high percentage of their free cash flow on share buybacks.
The shares outstanding have shrunk between 1-3% annually.
The dividend growth has been fantastic.
Mastercard increases its dividend every year with its latest increase being 11.3%.
The 10-year compound annual growth rate of the dividend is 41%, which is nuts.
Going forward the 10-20% range is more likely.
The payout ratio is 20%, which means there is plenty of room to continue growing the
dividend at a high rate.
Their shareholder equity and net debt is around $7 billion dollars.
This is very well covered by earnings.
Both Visa and Mastercard are scaleable, high-margin businesses.
They are free cash flow generating machines that will pay a fast-growing dividend well
into the future.
Their network effects give them a wide economic moat.
The key differences are that Visa has a larger market share in the United States and globally.
This enhances their network effect and data collection, allowing them to offer more value-added
services.
Both Visa and Mastercard earn the majority of their revenue from service and data processing
fees, but the two companies characterize these fees differently and have their own fee structures.
If you want to understand Visa’s business model more, then I made a highly detailed
stock review video of Visa.
This will be linked at the end of the video.
Another difference is in their return on invested capital.
At the end of fiscal 2020, Mastercards ROIC was an incredible 36%.
Put another way, it produced $0.36 in cash for every $1 invested in its business.
Visa has a virtually identical business, but its ROIC is only 19%.
That's still very high, but Mastercard has shown it can use its capital more efficiently.
This leads some investors to value Mastercard at a higher multiple.
So which stock do I like better?
I prefer Visa due to their larger network and pricing at a lower free cash flow multiple.
This gives them stronger network effects and increased leverage to capture new payments.
Both of these companies seem to have promising growth ahead.
The digital payment industry has massive growth drivers.
Approximately $18 trillion in consumer spending is still exchanged in cash and checks, which
could move to cards and digital accounts.
There are also New Flows, which represent a $185 trillion opportunity.
This includes person-to-person payments, business-to-consumer, business-to-business, business-to-small business,
and government-to-consumer.
Finally, they can grow the value-added services that they offer financial institutions, businesses,
and governments.
This creates a deeper relationship for Visa and Mastercard Clients.
I discuss all of this in my Visa stock review video, which you should definitely check out.
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