In the United States, four credit card networks bombard consumers with endless ad campaigns. Two of these, American Express (AXP 0.64%) and Discover Financial Services (DFS +0.00%), operate credit card segments but also have banking wings that add business complexity. Visa (V +0.21%) and Mastercard (MA +0.04%) only provide electronic payment solutions to businesses and consumers alike. Due to their focus on this segment, Visa and Mastercard are valued more richly than their other rivals. However, investors may find it difficult to discern which company is a better buy.
Visa Is Cheaper
Looking at the stock price alone, one might find this statement puzzling. Visa trades around $220 while Mastercard is above $350 at the time of this writing. But investors shouldn't be concerned about the price per share. Instead, they should concern themselves with valuation metrics when determining which stock is a better value. From a trailing twelve months price-to-earnings standpoint, Visa trades at a 46 times multiple where Mastercard is at 49. Why does a spread exist for companies performing the same operation? It all comes down to growth.
Before the pandemic, Mastercard's revenue growth was larger than Visa's. Both companies earn a significant amount of money on cross-border transactions which decreased during the lockdown and a few months thereafter. Now that travel is beginning again, Mastercard is once again growing faster than Visa. Mastercard's revenue grew nearly 36% where Visa's increased 27% during their latest quarterly earnings. Growth comes at a premium, so Mastercard is given a higher valuation.
Image source: Getty Images.
Mastercard's Global Focus
A common metric both card credit card networks report is payment volume on their networks. This statistic gives investors insight into how much money flows through both networks.
| Company | U.S. Credit | U.S. Debit | U.S. Total | International Credit | International Debit | International Total | Credit Total | Debit Total | Total |
|---|---|---|---|---|---|---|---|---|---|
| Mastercard | $274 | $345 | $619 | $583 | $703 | $1,286 | $857 | $1,047 | $1,904 |
| Visa | $600 | $730 | $1,330 | $683 | $705 | $1,389 | $1,283 | $1,435 | $2,719 |
Source: Visa's Third Quarter Results and Mastercard's Second Quarter Results. All values are in billions of dollars.
Domestically, Visa's transaction volume is more than double Mastercards. Internationally, Mastercard is within 90% of Visa's volume. While not every American has access to plastic, in 2018 82% and 72% had a debit or credit card, respectively. This doesn't leave much room for expansion within our borders. Fortunately for these two companies, The World Bank found in 2017 a mere 10% of the world's population had a credit card. With a more even starting point worldwide, Mastercard can continue its market share growth by executing in foreign nations.
Image Source: Getty Images.
Capital Return
Both companies have stock buyback programs that will increase their earnings per share via share count reduction. Back in December 2020, Mastercard approved a $6 billion repurchase program and Visa approved an additional $8 billion repurchases in January . Each pays a small dividend with yields of 0.55% (Visa) and 0.49% (Mastercard). While the dividend payout is relatively low, it is better than nothing. Both shareholder-friendly actions will increase investor returns over the long run.
| Company | 1 Year | 3 Year | 5 Year | 10 Year |
|---|---|---|---|---|
| Mastercard | 4% | 65% | 243% | 1025% |
| Visa | 12% | 55% | 172% | 971% |
The Consensus
Lately, Visa has proven a better stock than Mastercard. Yet, Mastercard has outperformed its rival over the long run. I believe Mastercard will outperform Visa due to its smaller size and being nearly even with Visa internationally where future growth opportunities reside. However, investors can feel confident in either stock, or they could take a basket approach and own both. There are many potential customers without a plastic card and both, Visa and Mastercard are hoping to win space in their wallets.
