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Introduction
Both Mastercard (NYSE:MA) and Visa (NYSE:V) are trading at or near their respective 52-week lows. For cautious investors who don’t like overpaying, this could be a signal that it might be time to add these high quality and frequently expensive stocks to their portfolio. The current bearish environment has created some pockets of opportunity. In this article, we explore if Mastercard and Visa are two of these opportunities. We evaluate earnings, risk and growth for each of the two securities. We further decompose the respective growth records and quantify the efficiency with which growth is achieved. We use Buffett’s maxim that “for every dollar retained by the corporation, at least one dollar of market value will be created for the owners” as our yardstick for growth in value. Towards the end of the article an investment action is suggested and a conclusion is offered.
Source: Berkshire Hathaway 1984 letter to shareholders.
Please take a look at Table 1. While both stocks are trading at or near their respective 52-week lows, MA is a slightly better deal as measured by the current share price as a percentage of the midpoint of the 52-week high and low. The beta statistic affirms this, Mastercard has a beta of 1.07 which implies it is slightly more sensitive than the market and Visa has beta of under 1 which implies it moves less than the market does on the upside and downside. This probably has to do with the market capitalization. Visa is over 30% larger than Mastercard by this measure. The larger the company size in relation to the total market, the more closely it will move with the market, ceteris paribus.
Preliminary Statistics
| Table 1: Stock Quote and 52 Week High/ Low | ||
| Mastercard | Visa | |
| Price (closing price on 9/26) | $ 290.11 | $ 180.59 |
| 52 week high | $ 399.92 | $ 236.96 |
| 52 week low (intraday 9/26) | $ 289.12 | $ 179.90 |
| Midpoint | $ 344.52 | $ 208.43 |
| Stock price as % of midpoint | 84.21% | 86.64% |
| Beta | 1.07 | 0.92 |
| Market cap ($ billions) | $ 283.77 | $ 376.78 |
Source: CNBC.com on September 26 & 27, 2022.
In Table 2, we look at the earnings yield which is the inverse of the P/E ratio. The earnings yield has the benefit of quantifying what return an investor can expect at today’s price. Earnings per share represents profit that is due to the shareholders. The management of the firm, entrusted with shareholder capital, decides how much of the capital to pay out in the form of dividends and how much to keep and reinvest in the business which, in theory will ultimately benefit shareholders.
Investors today can expect 46 basis points more yield by investing in Visa than Mastercard.
| Table 2: Earnings Yield | ||
| Mastercard | Visa | |
| Price | $ 290.11 | $ 180.59 |
| Forward earnings estimate | $ 10.59 | $ 7.43 |
| Earnings yield | 3.65% | 4.11% |
Source: CNBC.com and Seeking Alpha for the forward earnings estimate.
Risk
Please take a look at Table 3 for the credit rating of Mastercard and Visa from two of the three well-known rating agencies.
Both have stellar credit. I don’t think many equity investors are going to quibble about the one notch differential between the two companies. Having said that, it is noteworthy that Visa has both a stronger credit rating and more yield. By these two measures, Visa appears to be a better value.
| Table 3: Credit Ratings | ||
| Mastercard | Visa | |
| S&P | ||
| Rating | A+ | AA- |
| Outlook | Stable | Stable |
| Moody’s | ||
| Rating | A1 | Aa3 |
| Outlook | Stable | Stable |
Source: www.spglobal.com, www.moodys.com.
Earnings Growth
Please take a look at Table 4. With the exception of the 2019 to 2021 time period, Mastercard has grown earnings more than Visa. If you consider the 2015 to 2019 time period as “normal” then Mastercard has exhibited more than 4% in compounded growth than Visa.
| Table 4: Earnings Growth Rate | ||
| Year | Mastercard | Visa |
| 2015 | $ 3.35 | $ 2.62 |
| 2016 | $ 3.69 | $ 2.84 |
| 2017 | $ 4.58 | $ 3.48 |
| 2018 | $ 6.49 | $ 4.42 |
| 2019 | $ 7.77 | $ 5.32 |
| 2020 | $ 6.43 | $ 5.04 |
| 2021 | $ 8.40 | $ 5.91 |
| 2015-2021 CAGR | 16.56% | 14.52% |
| 2015-2019 CAGR | 23.41% | 19.37% |
| 2019-2021 CAGR | 3.98% | 5.40% |
Source: Author’s calculation, 10-K for Visa for 2015-2021, 10-K for Mastercard for 2015-2021.
There is more to the story than the ~4% compounded growth for which Mastercard exceed Visa for the 2015 to 2019 time period. If we dig a little deeper and only compare 2020 versus 2019 you will notice that Mastercard’s earnings declined over 17% while Visa’s only declined a little more than 5%. If you compare 2021 versus 2020, Mastercard’s earnings rebounded much more than Visa’s. Mastercard’s earnings grew over 30% while Visa’s grew just over 17%.
We have here the basic trade-off for the two stocks. Both are growth stocks, but within the universe of growth stocks, Visa is more stable. This probably has to do with where they do business. Entering 2020, Mastercard derived 68% of their net revenues outside the US and Visa received 55% of net revenues outside the US.
Dividend Growth
Please turn your attention to Table 5. It is noteworthy that for the 2015 to 2019 time period, Visa has had a slightly better dividend growth record. It is also worth pointing out that the dividend growth rate during the 2019 to 2021 time period exceeded significantly the growth in earnings for the time period as presented in the previous table. This is out of character and is not sustainable. It appears that both companies believe in managing dividend payouts so as not to cause any sharp changes in investor expectations. For the remainder of this article, we focus on the metrics during 2015 to 2019 time period to infer what results can be expected under “normal” circumstances. The dividend and earnings growth record for the 2019 to 2021 time period is likely not representative of what investors can expect moving forward.
| Table 5: Dividend Growth Rate | ||
| Year | Mastercard | Visa |
| 2015 | $ 0.64 | $ 0.50 |
| 2016 | $ 0.76 | $ 0.59 |
| 2017 | $ 0.88 | $ 0.69 |
| 2018 | $ 1.08 | $ 0.88 |
| 2019 | $ 1.32 | $ 1.05 |
| 2020 | $ 1.60 | $ 1.22 |
| 2021 | $ 1.76 | $ 1.34 |
| 2015-2021 CAGR | 18.36% | 17.86% |
| 2015-2019 CAGR | 19.84% | 20.38% |
| 2019-2021 CAGR | 15.47% | 12.97% |
Source: Author’s calculation, 10-K for Visa for 2015-2021, 10-K for Mastercard for 2015-2021.
So far, we have evaluated earnings and dividends. Now we examine the portion of the earnings that is retained.
Retained Earnings
Please take a look at Table 6 which exhibits earnings and dividends paid from 2015 to 2019 for Mastercard. In business theory, earnings in a particular year can be attributed to all the capital invested in the business up until just before that particular year. So, in theory, earnings in 2019 for a business can be attributed to all the invested capital in the business from inception up until the end of 2018. In 2019, the capital was put to use and delivered earnings for the owners of the business. We are going to narrow the scope and look at the retained earnings from 2015 to 2018 and attribute the earnings in 2019 to the retained earnings from 2015 to 2018.
Source: Mary Buffett and David Clark. The Buffettology Workbook. Simon & Schuster 2001
From 2015 to 2018 Mastercard retained a cumulative of $14.75 of shareholder’s earnings. That shareholder capital was employed in 2019 to generate $7.77 per share of earnings which is an increase of $4.42 from the 2015 earnings per share of $3.35. So, we can say that management kept $14.75 of shareholder money and gave shareholders a $4.42 bump in earnings for the time period presented. The “return on retained earnings” is 29.97% which is excellent and exceeds the inflation during the time-period comfortably.
| Table 6: Mastercard Retained Earnings | |||||
| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Mastercard EPS | $ 3.35 | $ 3.69 | $ 4.58 | $ 6.49 | $ 7.77 |
| Mastercard dividends per share | $ 0.64 | $ 0.76 | $ 0.88 | $ 1.08 | $ 1.32 |
| Dividend payout ratio | 19.10% | 20.60% | 19.21% | 16.64% | 16.99% |
| Retained per share | $ 2.71 | $ 2.93 | $ 3.70 | $ 5.41 | $ 6.45 |
| Cumulative retained earnings 2015-2018 | $ 14.75 | ||||
| Growth in earnings, 2019 minus 2015 | $ 4.42 | ||||
| Average payout ratio | 18.51% | ||||
| “Return on retained earnings” | 29.97% | ||||
In Table 7 we do the same exercise for Visa. From 2015 to 2018 Visa retained $10.70 of investor money. Shareholder capital was put to use in 2019 and generated and EPS of $5.32 which was $2.70 better than the $2.62 earned per share in 2015. The “return on retained” is a very good 25.2%.
| Table 7: Visa Retained Earnings | |||||
| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Visa EPS | $ 2.62 | $ 2.84 | $ 3.48 | $ 4.42 | $ 5.32 |
| Visa dividends per share | $ 0.50 | $ 0.59 | $ 0.69 | $ 0.88 | $ 1.05 |
| Dividend payout ratio | 19.08% | 20.77% | 19.83% | 19.91% | 19.74% |
| Retained per share | $ 2.12 | $ 2.25 | $ 2.79 | $ 3.54 | $ 4.27 |
| Cumulative retained earnings 2015-2018 | $ 10.70 | ||||
| Growth in earnings, 2019 minus 2015 | $ 2.70 | ||||
| Average payout ratio | 19.87% | ||||
| “Return on retained earnings” | 25.2% | ||||
In summary for this section, Mastercard, on average, paid out 1.36% less and delivered 4.77% more in earnings growth.
Market Value Added
We have looked at earnings, the portion of earnings paid out in dividends and the portion of earnings that is retained. We now turn to how the market reacts to these management-driven decisions.
Please take a look at Table 8 which shows the earnings of Mastercard and the average share price for the particular year. Using a similar logic as we have employed, we can say that from 2015 to 2018 Mastercard retained $14.75 of shareholder money and created a market value of $155.94. The average share price in 2019 was $246.75 and the average share price in 2015 was $90.81 which provides a difference of $155.94. For every dollar that Mastercard’s management retained during the period they created $10.57 in value which is pretty amazing and passes Buffett’s $1 reinvestment test tenfold.
| Table 8: Mastercard Retained Earnings and Share Price | |||||
| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Mastercard EPS | $ 3.35 | $ 3.69 | $ 4.58 | $ 6.49 | $ 7.77 |
| Mastercard dividends per share | $ 0.64 | $ 0.76 | $ 0.88 | $ 1.08 | $ 1.32 |
| Retained per share | $ 2.71 | $ 2.93 | $ 3.70 | $ 5.41 | $ 6.45 |
| Average share price | $ 90.81 | $ 94.85 | $ 129.41 | $ 191.50 | $ 246.75 |
| P/E ratio | 27.11 | 25.70 | 28.26 | 29.51 | 31.76 |
| Cumulative retained 2015-2018 | $ 14.75 | ||||
| Value added per share | $ 155.94 | ||||
| Value added per $1 | $ 10.57 | ||||
Source: Yahoo! Finance, Author’s calculation and Mastercard 10-K from 2015 to 2019.
In Table 9 we do the same exercise for Visa. From 2015 to 2018 Visa retained $10.70 of investor money. The retained earnings created a market value of $91.40. This figure is a result of the difference between the average share price of 2019 minus the average share price of 2015. So, for every dollar retained, Visa created $8.54 market value for shareholders which is very, very good.
| Table 9: Visa Retained Earnings and Share Price | |||||
| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Visa EPS | $ 2.62 | $ 2.84 | $ 3.48 | $ 4.42 | $ 5.32 |
| Visa dividends per share | $ 0.50 | $ 0.59 | $ 0.69 | $ 0.88 | $ 1.05 |
| Retained per share | $ 2.12 | $ 2.25 | $ 2.79 | $ 3.54 | $ 4.27 |
| Average share price | $ 71.03 | $ 76.75 | $ 98.62 | $ 133.18 | $ 162.42 |
| P/E ratio | 27.11 | 27.02 | 28.34 | 30.13 | 30.53 |
| Cumulative retained 2015-2018 | $ 10.70 | ||||
| Value added per share | $ 91.40 | ||||
| Value added per $1 | $ 8.54 | ||||
Source: Yahoo! Finance, Author’s calculation and Visa 10-K from 2015 to 2019
In summary for this section, Mastercard added $2.03 more in value for every dollar retained than Visa.
Which is a Better Deal?
Price is what you pay and value is what you get. We have seen that Visa has a slightly higher yield and lower risk than Mastercard, but Mastercard seems to have a better record of putting retained earnings to use. Which one is the better investment?
One way to resolve this is to consider the P/E ratio relative to growth in value or the PEG ratio. Please take a look at Table 10. Judging from the PEG ratio, Mastercard seems to be the better deal. You are paying less per unit of growth with Mastercard than for Visa.
| Table 10: Mastercard and Visa PEG Ratios | ||
| Mastercard | Visa | |
| Forward P/E | 27.39 | 24.31 |
| Earnings growth rate from 2015 to 2019 | 23.41% | 19.37% |
| PEG ratio | 117.03 | 125.47 |
Source: Author’s Calculation
Conclusion
The management of both these companies are excellent stewards of shareholder capital. For every dollar retained, Mastercard created $10.57 in value during the 2015 to 2019 time period. For every dollar retained, Visa created $8.54 in value for the same time period. Visa currently offers a better earnings yield at a slightly lower credit risk. Additionally, if you take the volatility of earnings into account then a good case can be made that Visa is the better deal. However, an allocation to this category of investments is probably a result of growth considerations not stability nor yield. For an already diversified portfolio looking to add growth, It would be inconsistent to select Visa instead of Mastercard simply because of the higher yield or that it has a one notch better credit rating. Mastercard offers similar exposure and is the better value if you consider the growth in relation to price paid.
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