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Both Visa Inc. (NYSE: V) and MasterCard (NYSE: MA) have benefited from the move toward greater use of electronic payment systems over cash. Yet even though Visa and MasterCard have helped to pioneer greater use of credit and debit cards, not only in the U.S., but across the globe, even newer technology on the mobile-payments front has threatened to supplant their networks. As a result, both companies have had to make major moves to sustain their competitive advantages, and many investors want to know which of the two giants is the smarter pick for their portfolios right now. Let's do a comparison of Visa and MasterCard on a number of metrics to see which company's shares are the better buy.
Valuation and stock performance
Visa and MasterCard have seen their shares go in opposite directions over the past year. Since August 2015, Visa shares have climbed by about 8% on a total return basis. By contrast, MasterCard has posted a 1% decline over the same period.
At first glance, Visa's gains have seemed to create a valuation disparity. When you look at simple valuation metrics based on trailing earnings multiples, Visa looks more expensive, trading at 34 times earnings. MasterCard only carries a trailing earnings multiple of 28. However, when you look at expectations for forward earnings, the multiples on both stocks nearly converge. MasterCard trades at 23 times forward earnings, compared to a fairly close forward earnings multiple of 24 for Visa. In terms of valuation, MasterCard might have a slight edge over Visa, but the difference isn't terribly large.
Dividends and capital allocation
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Neither MasterCard nor Visa has gone out of its way to reward shareholders through substantial dividend payments. Visa's current dividend yield is just 0.7%, and MasterCard is little better, currently carrying a 0.8% yield. The two stocks have made fairly generous increases to their dividends in recent years, with MasterCard boosting its payout by 75% since 2014 and Visa having made a similar-sized increase in the past three years.
Instead, Visa and MasterCard have focused on stock buybacks. In the past two quarters, Visa has spent nearly $3.5 billion on share repurchases, outpacing MasterCard's $1.8 billion in buybacks over the same period. Consistent use of shareholder capital in this manner shows that both card giants favor the tax efficiency of letting buybacks boost the stock price rather than hitting dividend investors with potentially taxable income on a quarterly basis. On the whole, Visa takes the edge in having a slightly shareholder-friendlier perspective with its capital allocation.
Growth prospects and risks
Visa and MasterCard are each trying to find ways to bolster growth from their traditional businesses while making forays into newer technology. Visa has had recent success on both fronts, announcing financial results in late July that pointed toward considerable long-term profit potential. Earnings for the quarter took a temporary hit, falling by roughly three-quarters, but acquisition costs related to its acquisition of its Visa Europe unit were primarily responsible for the bottom-line downturn. The move to integrate European operations under the Visa Inc. corporate umbrella should serve to assist European clients and help offer a stronger competitive position against MasterCard in its historical area of strength. Shortly thereafter, Visa announced a deal with PayPal under which the online-payments giant will promote Visa as a payment option and stop encouraging customers to link bank accounts rather than using Visa cards as PayPal funding choices. While many worry about the impact on PayPal's growth prospects, the deal is a big win for Visa in keeping a potential rival at bay while also gaining an advantage over MasterCard.
MasterCard's earnings were more upbeat, with adjusted net income rising 10% on a 13% rise in quarterly revenue. CEO Ajay Banga noted that global economic uncertainty could hold back the company's growth despite ongoing strength in the U.S. economy, but it still believes that it can maintain overall earnings growth within its typical historical double-digit percentage range. Moreover, the company recently announced the acquisition of payment-technology specialist VocaLink for $920 million, and Banga believes that the purchase will help expand MasterCard's ability to handle payments through methods other than credit and debit cards.
For the most part, Visa's and MasterCard's growth prospects look solid, and the path that they're taking toward taking full advantage of the opportunities ahead of them has thus far produced success. Visa takes a slight edge because of the potential of its PayPal partnership, but both companies should benefit from the continuing adoption of electronic payments technology throughout the world.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings, MasterCard, and Visa. 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.