When evaluating strong financial stocks, it of course helps to have solid fundamentals and to benefit from macrotrends in the industry and economy. But what can occasionally make a stock stand out from the pack is its competitive edge. It's usually that edge that makes the numbers look so good to begin with and what allows it to perform through any type of market cycle.
Two financial stocks, in particular, Mastercard (MA -0.24%) and S&P Global (SPGI -0.48%), have that killer advantage that has driven their long-term success and will sustain them in the future. Let's find out a bit more about these two companies.
1. Mastercard: In a league of its own
There's a reason Mastercard has been one of the most dominant performers over the past decade, with an annualized return of almost 32% through the end of 2020 and average earnings growth of about 16% per year. It is because there are only really two companies in its space. Along with Visa, Mastercard is part of a duopoly in the credit processing industry. These two companies handle billions of transactions per day and own 90% of the credit and debit card market.
While there are other credit processors, namely American Express and Discover, they both have different business models in that they serve as banks, also loaning the money to their credit card customers. As lenders, these companies take on the credit risk associated with making loans. Mastercard and Visa simply process the payments through their vast networks, generating revenue from fees paid on every transaction made using their cards. There is much less overhead, which creates huge margins and tons of cash flow to invest in new technologies and expand capabilities and reach.
One of Mastercard's big recent purchases was of Finicity, a fintech that allows users to connect their bank accounts to other payment apps. This provides Mastercard with another advantage as it gives the company a massive footprint in the growing area of open banking. "With the addition of Finicity, we expect to not only advance our open banking strategy but enhance how we support and accelerate today's digital economy across several markets," Michael Miebach, president of Mastercard, said in the company's announcement of the 2020 acquisition. It is also branching out by bringing cryptocurrencies onto its network, as it seeks to get in front of another trend.
Mastercard also stands to benefit from the ongoing shift away from cash transactions, as the world gradually moves to digital and contactless payments. The way the world pays and sends money will certainly change over the next decade-plus, but with its massive network and brand name, Mastercard will likely remain at the forefront of it.
2. S&P Global: A leader on multiple fronts
S&P Global's killer advantage is that it is a leader in not just one of its markets, but two of them. That's why it has been such an incredibly steady performer over the years. The stock price has not had a negative annual return since 2008, which speaks to that consistency. It's also a Dividend Aristocrat and has increased its annual dividend for 48 straight years -- a testament to its stability and longevity.
S&P Global has four major business lines; two of them are market leaders and the others are growing. Its credit rating business is its largest revenue generator, accounting for about 48% of revenue. S&P is one of just three major credit rating agencies, with a 40% market share. Moody's also owns about 40%, while Fitch is at about 15%. That's the entire market, which gives S&P a huge moat.
S&P Global is also a market leader in its indexing business, as it runs all of the S&P indexes, including the S&P 500, as well as the Dow Jones Industrial Average through a partnership. As it is in the credit rating business, S&P is one of only a few major players in the indexing business. It charges fees for listings as well as transactions and has licensing deals for exchange-traded funds (ETFs) and index funds.
Then there's its market intelligence business, which accounts for about 28% of revenue. Through this business, S&P provides data and research for investment professionals. Finally, there is Platts, a leading resource for market data for the energy and commodities industries. These are both subscription-based businesses.
The four segments provide a great mix of revenue, as the businesses complement one another and provide revenue during various market cycles. When one segment is down, another is up; that's why S&P Global has not had a negative annual return in more than a decade.
These are two great businesses with killer advantages that should generate consistent returns for investors for years to come.