Mastercard and Visa are two incredibly similar companies known for a duopoly on processing payments globally. Moreover, each stock has rewarded longtime shareholders handsomely with market-beating returns and growing dividends.
Due to their comparable product offerings and overlapping customers, choosing between Mastercard and Visa as an investment can be challenging. So let's dive deeper and see which stock is a better buy right now.
Valuation
When looking at two similar companies, it makes sense to start with valuation. Visa is the more valuable company, with a market capitalization of about $500 billion compared to Mastercard's $360 billion.
A key benchmark for comparing the worth of well-established companies such as Mastercard and Visa is the price-to-earnings (P/E) ratio, which compares a company's current market price to its trailing 12 months of earnings per share.
As of this writing, Mastercard and Visa traded at a P/E ratio of 33.5 and 29.4, respectively. These stocks are trading well below their five-year averages of 41.4 for Mastercard and 35.3 for Visa. So while both payment giants are trading at a discount compared to five-year trends, Visa wins in this category as the better-valued stock.
Returning capital to shareholders
There are two primary means for companies to distribute profits back to shareholders: dividends and share repurchases. First, dividends give shareholders the choice to reinvest their money in the company or retain the cash themselves.
Mastercard currently pays a quarterly dividend of $0.57 per share, which equals a dividend yield of 0.59%. Mastercard has paid a quarterly dividend since going public in 2006 and raised it annually since 2011. Similarly, Visa has paid and raised its dividend since its initial public offering in 2008 and raised it in consecutive years since then. After its recent 16% dividend raise, Visa now pays a quarterly dividend of $0.52, representing an annual dividend yield of 0.85%.
Next, stock repurchases provide a tax-efficient way to lower a company's share count outstanding. As Warren Buffett recently wrote in his annual shareholder letter, "The math isn't complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices."
Over the past five years, Mastercard lowered its shares outstanding from 1.03 billion to 938.1 million, a decrease of 9%. Meanwhile, during the same period, Visa reduced its shares outstanding from 2.2 billion to 2.07 billion, a decrease of 7%.
Data source: YCharts
It is evident that both companies prioritize returning capital to shareholders. Currently, Visa has a longer dividend streak and higher dividend yield, while Mastercard has repurchased more of its stock. That makes this shareholder-friendly category a tie.
Key financial metrics
For the next category, let's dig into some critical financial metrics for any company: net revenue and net debt.
Over the trailing 12 months, Mastercard generated $24.4 billion in net revenue, a year-over-year increase of 13%. Notably, for Q4 2023, management forecast net revenue growth at "a low double-digit rate."
Comparatively, Visa produced $32.7 billion in net revenue for its fiscal year 2023, a year-over-year increase of 11%. Additionally, Visa's management recently projected net revenue growth in the high single digits to low double digits for its fiscal year 2024.
A company's net debt (total debt minus cash and cash equivalents) illustrates the health of its balance sheet and whether it will either have the capital to potentially grow through acquisitions or be stuck paying down its debt.
On the surface, Visa has a substantially better net debt than MasterCard, with only $335 million compared to $8.1 billion. However, over the past 12 months, Visa paid $644 million servicing its debt compared to Mastercard's $544 million due to Visa having over $20 billion in debt compared to Mastercard's $15 billion. Both companies, which have been acquisitive in the past, will likely see interest expenses increase as rates remain elevated. Still, Visa has an easier path to paying down its debt if those interest expenses become prohibitive.
When you consider that Visa's market capitalization exceeds Mastercard's by about $140 billion, this category goes to Visa because Mastercard's revenue growth isn't outpacing Visa's enough to close that gap anytime soon, and Visa's balance sheet is healthier despite rising interest expenses.
Is Mastercard or Visa the better buy?
It's important to note that both Mastercard and Visa are facing increased calls for regulation as their duopoly has become more entrenched, and that this is a prominent risk factor for both.
Nonetheless, Mastercard and Visa are quality businesses that keep the world economy running smoothly, and investors should consider both essential to any portfolio. Still, if you had to pick between the two today, the better stock to buy for investors right now is Visa.
