Better Buy: PayPal Holdings, Inc. vs. MasterCard

By Markets Fool.com


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The financial industry has advanced by leaps and bounds recently, and the rise of online e-commerce has played a major role in changing the way people pay for things. MasterCard and other traditional credit card companies have had decades to build up impressive payment processing networks, and MasterCard in particular has worked hard to expand its reach across the globe and encourage the use of its payment methods over cash transactions both in the U.S. and in areas around the world. Yet PayPal Holdings has gone from its online auction-facilitation roots to become a viable alternative for those looking for ways to pay, and PayPal is aggressively expanding its own network to go beyond its original area of specialty.

Those who are encouraged by investment opportunities in the space want to know which stock is a better buy. Let's compare PayPal Holdings and MasterCard on a number of metrics to see which you should look at more closely.

Valuation and stock performance

Both PayPal and MasterCard have done reasonably well recently. PayPal is up about 7% from the closing price on its first day following its IPO early last summer. MasterCard shares have provided a total return of about 3% over the past year.

Typically, you'd expect a younger tech-related company to trade at a higher valuation than a more mature traditional financial business, and that turns out to be the case when you look at MasterCard and PayPal on a trailing earnings basis. PayPal's earnings multiple is 36, which is significantly higher than MasterCard's multiple of 29.

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However, taking into account near-term future growth tells a different story. Looking at forward earnings estimates, PayPal trades at just 22 times forward earnings, compared to a multiple of 23 for MasterCard. That leaves the two companies with similar relative valuations as long as you believe in the near-term growth projections for PayPal going forward.

Dividends

Only one of these two companies pays a dividend, but it's hard to get too excited about either one's commitment to returning shareholder capital through quarterly payouts. PayPal doesn't pay a dividend at all, which isn't terribly unusual for a young company that has set a high priority on reinvesting profits back into its business in order to grow more quickly. PayPal has also chosen to use stock repurchases rather than dividends to return additional capital to shareholders. By contrast, MasterCard does pay a dividend. But its current yield is only 0.8%, making it only minimally appealing to those who rely on dividend payouts for income.

To its credit, MasterCard has been making efforts to be more dividend-friendly to investors. Over the past three years, the company has boosted its dividend on four separate occasions, and it now pays more than six times the quarterly payout it did at the beginning of 2013. Still, MasterCard only pays out 20% of its earnings in the form of dividends, choosing to fund its own expansion efforts with much of its available capital. MasterCard has a slight edge on the dividend front, but it isn't a huge one.

Growth

Both PayPal and MasterCard have focused on growth. PayPal's smaller size has given it faster growth prospects, but MasterCard has also managed to keep up its pace of growth.

PayPal's recent results have been impressive. In its first-quarter financial report, PayPal enjoyed 19% revenue growth, sending net income up by more than 40%. Total payments volume was up by nearly a third, and it added 4.5 million new customer accounts to its 184-million strong network of users. Revenue has grown at a faster pace than its fixed costs, helping to boost cash flow. In particular, PayPal has done a great job of getting its users to make transactions using mobile devices, processing $21 billion in total payments volume on the mobile side. With the acquisition of Xoom last year, PayPal is looking to expand internationally, and opening up new markets should keep PayPal's prospects looking good.

MasterCard's performance hasn't looked as pretty, but it still has been solid. A 10% jump in revenue during the first quarter of 2016 couldn't prevent a slight decline in earnings compared to the year-ago period. Currency-related issues have weighed on the card giant and continued to do so during the quarter, and fundamentally, double-digit percentage gains on currency-neutral gross dollar volume, processed transaction counts, and purchase volume all point to a strong business. Rising operating expenses weighed on the bottom line, but MasterCard anticipates further growth opportunities ahead.

PayPal and MasterCard look very similar on these metrics, making it difficult to pick between them. In the end, PayPal's mastery of the mobile business could be just the long-term edge it needs to surpass MasterCard if the more mature card giant can't up its own game to defend its turf.

The article Better Buy: PayPal Holdings, Inc. vs. MasterCard originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends MasterCard and PayPal Holdings. 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.