More people across the globe are using electronic payment systems to make transactions, and both Visa (V -0.23%) and Discover Financial Services (DFS 1.62%) have worked hard to capture the potential for growth in the payment space. Visa is better known worldwide, but Discover has made a lot of progress in expanding the reach of its payment network and seeking new ways to do business. Many investors are interested in the payments space, and with a huge opportunity for growth, the question is which stock is likely to treat shareholders better. Below, you'll see how Visa and Discover compare on key aspects and decide which is the better buy right now.
Valuation and stock performance
Over the past year, Visa and Discover have both gained ground, but Visa has been the stronger performer. Visa is up 17% since June 2016, compared to just an 8% gain for Discover over the same time frame.
Even more striking is the difference in valuations between the two companies. Many see Visa as a bona fide growth stock, and that has led to extremely rich multiples to earnings. Currently, Visa trades at more than 45 times what it has earned over the past 12 months. Meanwhile, Discover trades like a value stock, with a trailing multiple of just 10.
Even when you incorporate future earnings expectations in to the mix, Visa is a lot more expensive. Its current forward multiple of 24 is almost triple Discover's valuation at nine times forward earnings. For those who look solely at valuation, Discover is the winner.
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Dividends
Discover is also a clear favorite when it comes to paying dividends. The company behind the Discover card offers a current dividend yield of about 2%, compared to just 0.7% for Visa.
Dividend growth has been visible at both of these companies. Visa has made eight consecutive dividend increases every year since 2009, and the quarterly payout has more than quintupled over that eight-year period. Discover saw a dividend drop as a result of the financial crisis, but since then, its dividend has risen 15-fold. With similar payout ratios, Discover emerges the winner on the dividend front as well.
Growth and risk factors
Fundamentally speaking, there are some major differences between the two companies. Visa acts solely as a card network provider rather than issuing its own cards, and although that limits its ability to profit from those who use its cards, it also eliminates the credit risks that card issuers retain. Visa has global scope, and the recent acquisition of Visa Europe increased Visa's footprint globally, helping it keep up with its competitors' own international expansion efforts. With more than 325 million credit cards on offer in the U.S., Visa has greater market share than all three of its largest competitors combined, and almost six times as many cards as Discover. Gains in revenue and income at Visa have been sustainable despite some geopolitical uncertainty, and investors are optimistic about Visa's ability to capitalize on future opportunities in the payments space.
Discover, meanwhile, is much more of a full-service financial institution, and that creates both opportunities and challenges. By retaining credit risk, Discover profits when it makes smart decisions about who gets a Discover card, but it also has to deal with the ups and downs of the business cycle. For instance, in Discover's most recent quarter, the company said that it saw a spike in charge-offs and provisions for loan losses. That cost Discover some valuable profit, but it also raised concerns about the long-term trajectory for the U.S. credit market and for the card company's future prospects. In response, Discover is moving back toward higher-quality credit, but that in turn could squeeze margin figures because of narrower spreads that more creditworthy customers demand. Still, Discover is seeking to expand its network reach, and that could bolster long-term growth.
Visa offers a purer play on the payment space than Discover, but Discover gives investors more complete exposure to all the aspects related to payments, as well as some consumer finance business as well. Based on valuation and dividends, Discover looks like the better buy now, even though Visa is likely to keep growing at a healthier pace well into the future.
