A lot of financial companies are not really in favor for many investors. Mostly because of all the hassle about interest rates, the European crisis and the rules of banking further tightened. For us it was enough reason to look a bit further into this sector. Soon we stumbled upon financial transaction companies. When everything goes digital, it’s no surprise that people tend to use their cards over cash when it comes down to payments. The last few years, non-cash transactions has grown an average 7 to 10%. In mature markets the market share is already at 73%, whereas there is still room to grow. But in emerging Asia, for example, the growth rate is an astonishing 20%.
There is a lot of upward potential in this market, but what about the businesses providing it?
For the past few months we had our eyes out for Visa Inc. ($V), American Express Co. ($AXP) and Mastercard Inc. ($MA). Visa is a good performing company with …numbers…. but trading at PE of … and at their 52 week high. It just didn’t add up for us. We actually waited until the price of Visa would drop a little, which didn’t happen.
So we moved along and started to look into American Express and Mastercard. The latter is the company we use ourselves for financial transactions, provided by our local bank. But because it is all about the numbers, we stepped into our normal routine of researching a company. Both companies are solid and have lots of potential on the long term. So which did we like best?
About American Express Co. (AXP)
American Express is the only one of the big three that issues their own cards, which means the basically lend you the money by using their card. Because of that, the biggest chunk of their income comes from interest and fees.
About Mastercard inc. (MA)
Mastercard only focuses on processing payments, and is the most accepted card world wide. With over 200 countries and territories it even leaves Visa behind. The company doesn’t issue their own cards, which means you can only get a Mastercard creditcard via a bank. With this they are reducing credit risk, which is generally taken up by the bank.
Both companies are innovative and will change the way we live by providing opportunities and improving the current processes. Like faster payments, contactess payments and safer constructions.They also both have a big focus on consumer and travelers by giving back in the form of perks and quality customer service.
In order to properly compare the companies, we made a list of the key ratio’s we found most important to look at. As a reference we used the market industries average.
MA here has the lower dividend yield with 0.8%, compared to the 1.8% yield of AXP. The dividend pay out ratio is almost equal with 21.4% (MA) vs. 20.4% (AXP), so no big difference there. But if you look at the dividend growth rate, MA makes more than up to it. The growth rate of AMX is a fair share of 12.2% (1 year) with an average of 8.8% over the past 5 years. While MA has staggering 45.5% 1 year growth and an average of 60% over the past 5 years. Because we are focusing on growth over yield, you can say that MA is the winner on this subject.
2. Key financials
The P/E ratio of MA is a rather high 28, while AXP looks a bit more attractive with a 11.5 P/E ratio. Only based on this you could guess which is the better pick. But because we want to see the context behind the valuation, we also look at the earnings per share (EPS), return on equity (ROE), the 5-year compound annual growth rate (CAGR) and the interest coverage rate (=debt ratio determined by how easily a company can pay interest on outstanding debt)
Earnings per share (EPS) – MA: 3.4 vs. AXP: 5.7
Return on equity (ROE) – MA: 62.2 vs. AXP: 25.7
revenue CAGR – MA: 11.8 vs. AXP: 3.5
Interest coverage ratio – MA: 82.3 vs. AXP: 5.9
It will come as no surprise that we have chosen Mastercard over American Express. Recently we added 22 shares of MA to our portfolio with a worth of €2131.80. Against a dividend pay out of $0.19 per share, it will give us a yearly dividend income of $16,70 0r €15 (pre-tax). Which seems low, but imagine the growth rate of over 40%. If the 2017 hike will the same we will be looking at $23.3 or €21 a year. On the long term it will give us huge upward potential by only means of dividend, let alone the capital appreciation.