The "War on Cash" Basket of Stocks: Third-Quarter Review

Third-quarter earnings season is just about over, and all four of our stocks in the "War on Cash" basket -- PayPal (PYPL 0.34%), Square (SQ -2.28%), Visa (V -0.59%), and Mastercard (MA 0.15%) -- have now reported their results.

In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, take a look back at each company's earnings and what stood out to them.

A full transcript follows the video.

This video was recorded on Nov. 19, 2018.

Jason Moser: Matt, it's that time of the quarter. Earnings season is wrapping up here. Listeners know that we talk a lot about the payments space, the War on Cash basket that we've enjoyed covering here. That is a PayPal, Square, Visa, and MasterCard. We wanted to go ahead and give our quarterly review with the War on Cash basket, see where these companies stand after this most recent earnings season. To give the listeners a quick update on this basket and where it stands from a returns perspective, since the date of inception, July 24, 2017, the War on Cash basket is up 65.2% versus the market's 9.1%. Those numbers are good as of about 1 PM Monday afternoon here on November 19th. I wanted to make sure to get those as updated as possible, Matt, because there's a lot of blood on the streets out there today in the market. Some of these names, it looks like they might be on sale, huh?

Matt Frankel: Yeah, pretty much anything involving tech has been getting hammered. Not happy about it from watching my portfolio every day, but hopefully, we'll be able to shut up about these one of these days and we can all buy a few more and take advantage.

Moser: That's a nice part about the holiday season. We have a couple of days off here and there, so we can be quiet. Let's kick it off here with PayPal really quick, to give you an idea of what was going on with PayPal for the quarter. Total payment volume was up 24% to $143 billion. Transactions, which is engagement, grew 9.5% on a trailing 12-month basis. Another encouraging metric, mobile payment volume was $57 billion, up 45% for the quarter.

All in all, PayPal is doing a lot of what we continue to see it do quarter in and quarter out. What I want to keep an eye on is Venmo. Venmo is bringing in good numbers, the results are there. $17 billion flowed through that Venmo network for the quarter. 24% of users are now participating in monetizable action. But it's also worth noting that this quarter didn't reflect the price increase that users of Venmo are going to start feeling here in the coming quarters, in regard to the instant funding aspect of the network there.

As encouraged as I am by that part of the business, it's also worth noting that PayPal on its own is doing quite well. Let's keep Venmo on our radar, make sure that they're not rushing to monetization here. You don't want to scare those users away. But all in all, I felt like it was an encouraging quarter for PayPal. Matt, tell us really quick, what were your takeaways for Square's most recent quarter?

Frankel: Square, doing great, just by the numbers. Looking at adjusted revenue, up over 60% year over year. Subscription revenue, if you back out acquisitions, almost doubled. That's without the impact of acquisitions. The thing that stood out to me most is that their margins continue to expand year over year. Looking at the numbers, the adjusted margin is 16% this past quarter, compared to 13% a year ago. In their core payment processing business, the profit margin on those transactions has gone up to 1.07% from 1.05%. Two basis points might not sound like a lot of margin, but it is when you're talking about pennies per transaction, like a 1% margin.

Square is doing great. The stock has been absolutely hammered lately. They're down 35% since just the end of the quarter. It's all because of things that are likely to be very temporary headwinds, have nothing to do with the growth story. The CFO, Sarah Friar, left. They just announced she's leaving earlier than planned. She actually left last Friday. Jack Dorsey sold some stock. The market's not that happy that Square's getting into the personal credit business. But this is a company with tremendous potential for growth, and they're achieving that potential. The growth has been sustained for a long time now, even accelerating in many ways.

Warren Buffett made his bold prediction about Wells Fargo. My bold prediction is that in a decade from now, Square is going to be the most valuable of all of the War on Cash basket stocks.

Moser: That's a bold statement. I like it!

Frankel: It's time to be bold here.

Moser: Listen, Square is by far and away the highest-risk holding of the four in the War on Cash. And really, that was the point behind the War on Cash basket, to have a little bit of exposure to all areas of risk there. Square gives you the higher risk.

We talk about our market leaders in that basket. Visa is certainly one of them. Not much to say here. It's relatively status quo for the largest card company out there. Everybody, I think, has a Visa card in their wallet at this point. Payments continue to grow nicely. The company is immensely profitable. The only real criticism that I have with Visa was in regard to the dividend. They raised their dividend recently, but it was a very, very modest amount. I feel like Visa and MasterCard could probably do a little bit better on that cash in the pocket for shareholders. They continue to repurchase shares. Share count is down more than 12% since 2013. But you look at the company's payout ratio, and I think these numbers are fairly memorable here. Their payout ratio is around 19%. Since 2013, it hasn't exceeded 23.6%. That's all to say that they can absolutely afford that dividend, and they can afford to grow that dividend.

Again, nothing terribly surprising with the quarter. It was a good quarter. I just, frankly, would love to see them raise that dividend a little bit more for shareholders. Maybe that will happen in time. What was your takeaway with MasterCard?

Frankel: I could say the same thing. Neither Visa or MasterCard is a high dividend stock.

Moser: It feels like they should be.

Frankel: They should be. I think they will. Right now, we're in the second or third inning of the war on cash. Once we're in the seventh or eighth inning, I think we're going to see them become actual high dividend stocks. I like that they're buying back shares. MasterCard spent over $1 billion on repurchases in the third quarter alone and bought a bunch more in the first little bit of October to take advantage of the weakness. I'm definitely a fan of when companies take advantage of price drops by using buybacks.

I have mixed feelings about it. I would love to see them pay a little bit more of a dividend. But at the same time, I understand, one, the importance of investing cash back into the business; and two, of buying stock, especially when the market's volatile like this. So, just like Visa, MasterCard's business looks great. Everything's growing at pretty much a double-digit rate. Revenue is growing faster than expenses, which is really nice to see. International revenue is really taking off. Cross-border transactions up 17% year over year.

These companies are growing. There's definitely an argument to be made that the money they're investing back into their business and not paying out as dividends is being well-spent. Like I said, I have mixed feelings. I think within the next five years or so, you're going to see them prioritize dividend increases as they grow into the new cashless society.

Moser: That's a very Buffett-esque quality. They feel like they can do more with that money right now as opposed to paying it out in the form of dividends. From that perspective, I agree. I think that makes a lot of sense. At least that's encouraging. It's a glass-half-full way to look at it, man. Thanks.

Frankel: It's tough to argue with that logic when they're producing double-digit growth rates.

Moser: Yeah, listen, I'm a happy shareholder either way. Don't misunderstand me. [laughs]