Visa (V 0.33%) and American Express (AXP 0.07%) have been showing their defensive fortitude lately. The stocks are down roughly 4% and 10% over the last year, respectively, but that actually looks pretty good when compared to the market at large.
But while each financial services giant has significantly outperformed the S&P 500 index over the last 12 months, both stocks have still seen their valuations pushed down by macroeconomic headwinds and trends shaping the stock market at large.
Which big-name financial services provider will deliver superior returns for long-term investors at current prices? Read on for a look at differing takes on the question from two Motley Fool contributors.
Visa could benefit from rising inflation.
Parkev Tatevosian: Visa's stock has held up relatively well amid broader stock market declines. The international payment processor gets a percentage of transactions undertaken with any card with its name. Considering there were over 4 billion Visa cards as of the end of its fiscal third quarter, the attractiveness of that revenue stream is all the more powerful.
Interestingly, rising inflation worldwide could be good news for Visa. As I mentioned, Visa takes a percentage of sales transacted using its cards. If total spending, fueled by inflation, rises, Visa's revenue will increase. Overall, Visa's decades of developing relationships with merchants and customers have allowed it to expand its total revenue from $11.8 billion in 2013 to $29.3 billion in 2022. More impressively, Visa's operating profit margin averaged 65.5% in that period.
Competitive forces in the industry are light with itself and Mastercard (MA -0.07%) the dominant players. On the consumer side, the most common promotional activity is a small percentage cash-back offer. For merchants, the selling point is access to the spending power of over 4 billion Visa cards. Light competition means higher profit margins for industry participants could persist.
Data by YCharts.
At a price-to-earnings multiple of roughly 30, Visa could be an excellent stock for long-term investors to buy right now.
The case for American Express
Keith Noonan: While Visa's massive payments network represents a strong competitive advantage, I think that American Express' brand and member-rewards-focused approach creates a moat and potentially leaves more room for long-term expansion. American Express has great brand strength. Its focus on member rewards and serving a premium-oriented customer base should help it carve out a lasting position in its corner of the financial services space.
Crucially, these distinguishing characteristics are helping the company score wins with younger customers seeking credit cards. There's strong evidence that the company's services and brands are resonating with younger customers, and that bodes well for the future.
The combined millennial and generation Z cohort stands as AmEx's fastest-growing U.S. customer demographic category, and this cohort saw a 39% year-over-year increase in spending in the third quarter year over year while also accounting for 60% of new-card acquisitions. While some financial services companies may come under pressure from emerging fintech competitors, American Express appears to have a recipe for longevity in the space.
In the near term, American Express is benefiting from the continued rebound for travel spending and should continue to do so in the near future even if macroeconomic pressures depress spending in other areas. Over the long term, the company should continue to benefit from the ongoing growth of cashless transactions in its domestic market and abroad.
AmEx also pays a dividend yielding roughly 1.1% at today's prices. While the company halted payout growth at the height of pandemic-related uncertainty, it's paid a dividend for decades and hasn't lowered its payout in 33 years.
Data by YCharts.
American Express is valued at just 7 times trailing free cash flow, and it has a non prohibitive forward price-to-earnings multiple of roughly 15.
Which stock is the better buy?
If you're only looking to own one of these stocks, it makes sense to compare each company's strengths and weaknesses in order to determine which is the better portfolio fit. Visa has the largest overall payments network, but it trades at a higher price-to-earnings multiple than American Express. Meanwhile, American Express has a more distinguished brand focus, but it may have some extra risk factors because it also operates as a bank to back up its credit products.
For investors looking to build positions in top financial services companies, this is a case in which buying both stocks could be the right move. Both companies have established, sturdy businesses and trade at valuation levels that leave room for long-term upside.
