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Better Buy: Visa Inc. vs. MasterCard

By Dan Caplinger - Mar 27, 2016 at 9:20AM

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Which card-network giant is more promising?

Image: Visa.

Electronic payments continue to gain growing acceptance across the globe, and both Visa (V 0.31%) and MasterCard (MA 0.58%) have embraced that movement by making their credit and debit cards more universally available. Even so, new technology from upstarts in the mobile-payments arena has posed threats to both Visa and MasterCard, and the two companies are working to fight back and defend their turf. Investors who are interested in the space typically want to know which stock looks like a better bet. Let's compare Visa and MasterCard on a number of metrics to see which company's shares are more attractive.

Both Visa and MasterCard have posted gains over the past year. Since March 2015, Visa shares have produced a total return of about 14%, which is slightly better than the 6% rise from MasterCard over the same period.

Even though Visa has outpaced MasterCard recently, both stocks have relatively similar valuations based on simple earnings multiple metrics. On a trailing basis, the two stocks share an earnings multiple of about 27. When you incorporate forward earnings expectations, the multiples on both stocks fall substantially, but no sizable difference emerges. Both Visa and MasterCard carry forward earnings multiples between 22 and 23. On a simple valuation basis, there's no large distinction between shares of Visa and MasterCard.

It's also difficult to distinguish MasterCard and Visa based on their dividend policies. Both stocks currently have dividend yields that are almost identical, at around 0.8%. Neither company has shown any signs of prioritizing dividends as a major part of their return of capital to shareholders, and even recent increases of 15% to 20% for both companies' payouts haven't done much to keep up with the long-term share-price appreciation for the two stocks.

The philosophy of both companies prefers the use of stock buybacks rather than dividend payments to shareholders. Visa spent $4.2 billion on repurchasing stock during 2015, and MasterCard followed suit with $3.5 billion in buyback activity. That proves that both companies have additional capital to return to shareholders and that they're not against doing so, but for those seeking regular income payments from their shareholdings, neither Visa nor MasterCard are likely to meet their needs.

Both Visa and MasterCard have worked hard to keep their growth rates as strong as possible, and both have had reasonable success in doing so. Visa's fiscal first-quarter results included a 5% rise in revenue, overcoming the strong U.S. dollar and its impact on the money it brought in overseas. Even more encouragingly, net income rose at a 24% pace. Payment volume grew 12%, and total processed transaction jumped 8% to 19 billion. Visa also expects the remainder of fiscal 2016 to be strong, with net revenue growth in the high single-digit to low double-digit percentage range on a constant-dollar basis. Adjusted earnings per share should come in somewhere in the lower range of the mid-teens on a percentage basis when considered in a currency-neutral manner.

MasterCard also reported solid results in late January, with revenue rising 4% on 12% gains in gross dollar volume and purchase volume when measured in constant currency. Even with 2.3 billion MasterCard cards in circulation, the company believes it is growing the use of electronic payments throughout its product lineup. It is also fostering partnerships to encourage adoption of newer technology that can stand up to competition from tech-focused new entrants to the industry. The biggest difference with MasterCard is that its exposure to foreign markets seems somewhat larger, and the impact of foreign currency weakness has been larger at MasterCard.

Both Visa and MasterCard have good growth prospects, and they look similar on a dividend and valuation front. In the end, perhaps the biggest question for investors is where you expect future growth to come from. MasterCard's initiative in focusing on the international realm gives it an edge worldwide, but if you think the U.S. economy will continue to outperform in the years to come, then Visa might give you more of the domestic focus you'd prefer.

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Stocks Mentioned

Mastercard Incorporated Stock Quote
Mastercard Incorporated
$321.53 (0.58%) $1.85
Visa Inc. Stock Quote
Visa Inc.
$201.74 (0.31%) $0.62

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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