The two largest payment networks may seem interchangeable. Visa and Mastercard are both respected, high-performing companies, with stocks that have crushed the market over the years. Mastercard has delivered a 7,760% return for its shareholders since going public in 2006, while Visa is up 1,480% in the 13 years it has been publicly traded.
Globally, there's still an estimated $18 trillion in consumer spending done in cash. That means there's plenty of growth available in digital transactions. However, choosing between two companies that are so similar can be difficult. Beyond historical stock returns, there are a few differences to help investors choose.
Image source: Getty Images.
Leadership
Mastercard recently made a leadership change, as longtime CEO Ajay Banga moved into the chairman role. This cleared the way for Michael Miebach to take the helm. Miebach has served the company for the past decade, most recently as chief product officer. There's no doubt some overlap between the two leaders, but review site Glassdoor.com shows 89% of employees would recommend the company to a friend, and an astounding 98% approve of the CEO.
Alfred Kelly took over as CEO of Visa in 2016 after spending much of his career at American Express. He stepped in as chairman of the board in 2019. For Visa, 82% of employees would recommend the company to a friend and 94% approve of the CEO.
With a slight edge in employee ratings and the decidedly better governance practice of separating the chairman and CEO roles, Mastercard gets the edge in this category. It's an advantage to have the highly respected, incredibly successful former CEO still involved as chairman of the board.
Network
Visa and Mastercard have expansive networks across the globe. Each includes more than 200 countries. Cards and total volume for the pair dwarf the closest competitor, American Express.
| Company | Cards* | Total Volume |
|---|---|---|
| Visa (V +0.21%) | 3.5 billion | $11.8 trillion |
| Mastercard (MA +0.14%) | 2.2 billion | $6.5 trillion |
| American Express | 114 million | $1.2 trillion |
Data Source: Visa. *As of calendar year 2019.
The companies' networks are also geographically diverse. Both see more transactions internationally than in the U.S. However, Mastercard has an edge in deriving 63% of its business from overseas, compared to only 54% for Visa.
| Company | Domestic Volume | International Volume |
|---|---|---|
| Visa | 53.7% | 46.3% |
| Mastercard* | 63.4% | 35.4% |
Data Source: Visa, Mastercard. *Other = 1%.
Finally, each company sees volume across consumer credit, consumer debit and prepaid, and commercial cards. For fiscal year 2020, Visa saw a larger percent of volume across commercial cards. That may insulate it slightly against a recession as consumer spending makes up 68% of U.S. gross domestic product.
| Company | Consumer Credit | Consumer Debit and Prepaid | Commercial |
|---|---|---|---|
| Visa | 38% | 46% | 16% |
| Mastercard | 38% | 51% | 11% |
Data Source: Visa, Mastercard.
Both companies have network strength, Mastercard with its international exposure and Visa with a heavier commercial exposure.
The tiebreaker here goes to Visa because of its exclusive contract with Costco. The pair signed an agreement in 2015, ending Costco's 16-year partnership with American Express. At the time, 1 out of 10 American Express cards were through the Costco relationship. Visa saw revenue growth jump to 21% following the deal from a consistent 8% to 9% in the previous three years.
Financials
As you would expect with asset-light businesses like the two largest payment networks, Mastercard and Visa convert a lot of revenue generated into operating profit. Both are impressive, but Visa's 64% operating margin is slightly better than Mastercard's 53%. Its return on invested capital is also significantly higher than Mastercard's, signaling a better allocation of capital. Neither company sports much of a dividend, choosing to return capital through share buybacks instead.
| Metric | Visa | Mastercard |
|---|---|---|
| TTM Revenue | $21.35 billion | $15.45 billion |
| Five-year annual revenue growth | 10% | 10% |
| Operating margin | 63% | 53% |
| Return on invested capital | 35% | 18% |
| Dividend yield | 0.56% | 0.47% |
| Five-year change in shares outstanding | -12% | -10% |
Data Source: YCharts. TTM = trailing 12 months.
Here, Visa's better capital allocation tips the scale in its favor. It also has more potential to accelerate its shareholder returns as the cash on its balance sheet has grown to $16.5 billion, 3.5% of its market cap. That compares to $7.3 billion and 2% for Mastercard.
Tale of the tape
Choosing between the two companies comes down to what one values as an investor. Going just by the numbers, Visa has the edge with higher profitability, better returns on invested capital, and the potential for greater dividends and buybacks. That said, Mastercard isn't far behind.
Governance is one of those items that seems to be forgotten until it's the only thing that matters. Just ask shareholders of Under Armour or General Electric, who saw returns plummet with no one to reign in strong-willed CEOs.
For me, the separation of CEO and chairman is enough to tilt the scales in favor of Mastercard, but each investor has to answer what's most important to them. Ultimately, there's no wrong answer when choosing between two excellent businesses.
