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Better Buy: Visa Inc. or American Express Co.?

By Dan Caplinger - Jan 20, 2016 at 8:41AM

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These card giants have gone in different directions, but which looks more promising now?

Image: Wikimedia Commons.

The business of credit cards and electronic payment processing has been a huge growth driver in the financial sector for years, and both Visa (V -1.21%) and American Express (AXP -0.88%) are among the oldest players in the business. Yet even as consumers and businesses around the world get more used to using electronic means to accept payments, the performance of Visa and American Express stock has diverged. Visa has had more recent success, but some think American Express might offer a better bargain. Let's compare Visa and American Express to see which deserves more consideration for a place in your portfolio.

Between the two companies, Visa has been the clear winner. Over the past year, Visa stock has climbed 13%, compared to a 26% decline for American Express.

That divergence has produced a big discrepancy in earnings-based valuations for the two companies. On a trailing basis, Visa stock fetches about 28 times its earnings over the past year, which puts a premium on its growth prospects going forward. By contrast, American Express trades at just 11 times earnings, making it much more value-priced.

Even when you take potential growth into account, the valuation disparity remains. Visa trades at about 22 times forward earnings compared to a multiple of less than 12 for American Express. By that measure, American Express is clearly less expensive.

Dividend investors can also see a clear distinction between the two companies. Visa has a yield of just 0.8%, but American Express has put more value on paying dividends with its 1.8% yield.

Interestingly, neither company has stressed the value of dividends. Both American Express and Visa pay less than 20% of their earnings in dividends, preferring to use their capital for other purposes. Yet both have raised their dividends substantially over the past year, with Visa giving shareholders a 17% raise during the autumn compared to American Express' 12% boost earlier in 2015.

With roughly equivalent payout ratios, the edge has to go to American Express' higher yield. It will take extensive boosts to Visa's dividend stemming from its expected future growth for the industry-leading card issuer to catch up on the yield front.

The trade-off for American Express' higher dividend yield and cheaper valuation is in its earnings growth prospects. In its most recent quarter, American Express saw revenue fall 1.3%, and that led to a 14% drop in net income, far worse than most investors had expected. The U.S. dollar hurt AmEx's international business, but even on a currency-neutral basis, adjusted sales growth of just 3% doesn't show the same growth potential that the card giant once had. The company has had to spend more on marketing and promotion, and it's been increasingly difficult for AmEx to bring in new cardmembers.

By contrast, Visa has been able to grow its business despite industry turmoil. The company posted 11% operating revenue growth in its most recent quarter, and net income rose 12% despite the dollar's impact. Rising volumes of payments and new alliances with retailers and other merchants helped boost gains. Moreover, with no exposure to cardmembers, Visa doesn't have to deal with the same default risk that American Express faces.

For those looking to choose between American Express and Visa, the biggest question is whether one prefers value propositions or is willing to pay up for growth. Visa certain doesn't trade at a bargain price, but it has handled the current global turndown in much better shape than American Express. By contrast, American Express stock has fallen far enough that it looks cheap, and if you think that the charge-card pioneer can bounce back, then American Express arguably has further to climb from its current depressed levels.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Visa. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

American Express Company Stock Quote
American Express Company
$163.90 (-0.88%) $-1.45
Visa Inc. Stock Quote
Visa Inc.
$214.52 (-1.21%) $-2.62

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