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Better Buy: Visa Inc. vs. PayPal Holdings

By Dan Caplinger - Apr 4, 2016 at 2:21PM

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Which financial services company's stock is more promising?

Image source: PayPal.

How people pay for things is changing, and some have looked for a changing of the guard between older methods of making payments and the newest available technology. Visa (V -1.97%) has more than half a century of history that dates back to the introduction of the Bankamericard in the 1960s, and it has billions of rectangular plastic cards in the wallets of consumers around the world. PayPal Holdings (PYPL -3.22%), on the other hand, has focused its attention on a post-plastic world, and it's working toward greater integration of mobile payments into its framework. Investors who are interested in the space typically want to know which stock looks like a better bet. Let's compare Visa and PayPal on a number of metrics to see which company's shares are more attractive.

Both Visa and PayPal have posted gains in the recent past. Over the past year, Visa shares have produced a total return of about 20%. PayPal hasn't traded as a separate company that long, but it's up 6% since July 2015, when it became available in the when-issued market prior to its formal spinoff.

A look at some simple valuation metrics shows a mixed picture for the two financial-services companies. When you look at earnings on a trailing basis, PayPal looks much more expensive than Visa, sporting an earnings multiple of 39 compared to Visa's 28. However, forward earnings expectations tell a much different story, reversing the order and making Visa look slightly more expensive. Visa shares currently trade at 24 times forward earnings estimates, and that's greater than the 22 times earnings that PayPal fetches on a forward basis. All told, Visa and PayPal both have compelling reasons to favor them on a valuation basis.

One area where it's easier to compared Visa and PayPal is with dividends, because only one of the companies actually pays one. Visa has paid investors a dividend since coming public in 2008, while PayPal hasn't yet returned any capital to shareholders through dividends.

Yet it's important not to give Visa too much credit with its dividend policy. The stock yields only 0.7%, and its payout ratio of 18% is quite stingy compared to most of the credit card giant's peers among the Dow Jones Industrials. Visa has increased its dividend payments lately, including a boost of 17% last fall. But the company has made much greater efforts to use stock repurchases for returning shareholder capital, spending billions of dollars annually. Nevertheless, based on the current situation, something is better than nothing, and that gives Visa the edge over PayPal for dividend investors.

The big question for Visa and PayPal going forward is what their growth rates will look like. Visa has been able to grow its impressive network across the globe when you take out the adverse factor of foreign currency, and net income jumped by almost a quarter in Visa's most recent results. The strength of the U.S. economy has served Visa's domestically focused operations well, but Visa is also looking at its pending purchase of Visa Europe as a method of fighting back against international competition and establishing a wider footprint around the world.

PayPal is also working aggressively to maximize its growth, and its recent results show signs of success on that front. Increases in the 20% to 30% range for total payment volume and adjusted net income reveal the depth of PayPal's opportunity to capture a greater share of the e-commerce market. Yet PayPal also believes that it can break into Visa's traditional territory by offering payment-processing services within in-store locations. PayPal hopes to boost its earnings per share by as much as half in 2016, and if it does so, it will go a long way toward justifying its current share price.

Both Visa and PayPal are still in growth mode, and the two stocks look similar enough that it's hard to say clearly which one is the better buy. In the end, if you think that PayPal's e-commerce and mobile emphasis will be able to surpass Visa's long dominance of the industry, then PayPal could be the smart pick. More conservative investors will likely go with Visa's longer history as the main factor in its favor.

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Stocks Mentioned

Visa Inc. Stock Quote
Visa Inc.
$199.99 (-1.97%) $-4.01
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$77.18 (-3.22%) $-2.57

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

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