The payment landscape is evolving rapidly, with cash losing market share to innovative payment methods such as buy now, pay later, cryptocurrency, and digital wallets to transact goods and services seamlessly. While cash is still relevant, prudent investors want to capitalize on the global transformation away from cash.
While there are many exciting growth companies in the payment sector, investors should not forget about the most dominant players, all of which continually grow market share and return capital to shareholders. With that in mind, here are three payment stocks worth adding to your portfolio.
1. American Express
Beyond being a favorite stock of Warren Buffett, who has owned it in Berkshire Hathaway's stock portfolio since 1991, American Express (AXP -0.71%) is a powerhouse for payments across the globe. Investors might be surprised to learn that American Express generates more revenue annually than competitors Mastercard (MA -0.79%) and Visa (V -0.59%) combined.
That's partly due to American Express' "closed-loop" network, which allows it to charge higher merchant fees and annual fees for cardholders versus Mastercard and Visa's "open-loop" network that seeks volume. Therefore, Mastercard and Visa individually generate more net income than American Express despite less revenue.
Focusing on American Express, the company recently reported its 2023 annual earnings, which featured revenue of $60.5 billion in revenue and diluted earnings-per-share (EPS) of $11.21, a year-over-year increase of 14% for both metrics. Additionally, management gave its bullish outlook for 2024, including revenue growth between 9% to 11% and a diluted earnings per share increase of 13% to 17%.
American Express prioritizes returning capital to shareholders through dividends and share repurchases. Since 1989, the company has consistently paid a quarterly dividend, recently increasing it by 17% to $0.70 per share. Additionally, aggressive share buybacks by management have reduced outstanding shares by 14% over the past five years to 723 million outstanding shares, and the company is in the early stages of a 120 million share repurchase program.
Because of its closed-loop network, American Express is susceptible to defaults. So it has to set aside an expense called total provisions for credit losses, which accounts for expected losses likely to default or become unrecoverable. The metric grew from $2.2 billion in 2022 to $4.9 billion in 2023, or 123%, due to elevated interest rates that continue to weigh on some businesses and consumers.
Still, on a valuation basis, American Express stock looks cheap compared to its competitors using the forward price-to-earnings (P/E) ratio, which compares a stock price to its forward earnings. American Express' forward P/E ratio multiple stands at 16, which is significantly lower than Mastercard's and Visa's P/E ratios of 32 and 28, respectively.
2. Mastercard
Mastercard is the second-largest payment company worldwide, with a market capitalization of $431 billion and 3.3 million cards under its own name and its Maestro brand. The company has increased its dividend for 13 consecutive years, recently increasing its quarterly dividend by 16% to $0.66 per share.
Like American Express, Mastercard continually buys back its outstanding shares, reducing its share count by 9% over the past five years. Additionally, the company has approximately $13.6 billion remaining under its current share repurchase program after spending $9 billion in 2023.
One of Mastercard's key drivers for growth is consumer spending, which has held up firmly despite elevated interest rates and inflation pressures. Digging into Mastercard's financials, the company generated $25.1 billion in revenue and $12.26 in adjusted EPS for 2023, a year-over-year increase of 13% and 15%, respectively. Management also provided a positive outlook for 2024, predicting net revenue will grow 13% to 15%.
Finding a bear case for Mastercard is challenging, but one area to watch is increased antitrust regulation. Last year, Mastercard and Visa settled a nearly decade-long class action lawsuit for $5.6 billion, addressing allegations from over 12 million retailers who claimed that the payment giants had improperly fixed fees on credit and debit cards. As a result of the increased scrutiny, Mastercard is putting more money aside for litigation provisions, expensing $308 million in its most recent quarter alone.
Despite increased competition, antitrust concerns, and pressures on consumer spending, Mastercard's growth appears unaffected. Better yet, management's focus on returning capital to shareholders makes it easier for long-term investors to buy and hold.
3. Visa
The last stock on this list, Visa, is the largest company by market capitalization among its peers at $561 billion. As previously referenced, the payments giant operates more like Mastercard than American Express, relying on consumer volume for success. Visa is another shareholder-friendly stock with a long history of rising dividends and share repurchases.
Visa currently pays a quarterly dividend of $0.52 per share, equating to an annual yield of 0.75%. Also, management has repurchased approximately 9% of its outstanding shares over the past five years and had $26.4 billion of remaining authorized funds for share repurchases as of Dec. 31, 2023.
Beyond its dividends and share repurchases, Visa's revenue isn't growing quite as fast as Mastercard's, but it's still impressive given its size. Specifically, Visa generated $33.1 billion in revenue for its fiscal year 2023, representing year-over-year growth of 11%. Also, management's revenue guidance for its fiscal year 2024 is in the "low-double digits," meaning likely between 10% and 12%.
Where Visa excels is its operating margin -- the percentage of revenue a company keeps after accounting for operating expenses -- which stood at 69% for its most recently reported quarter. For comparison, Mastercard's operating margin was 56% for its most recent quarter. In other words, Visa is more efficient than Mastercard in turning revenue into profit. Over the trailing 12 months, Visa posted $18 billion in net income versus Mastercard's $11.2 billion.
Are these three payment stocks worth buying?
Naturally, investors can have a fear of missing out when it comes to stocks. In the payment sector, cryptocurrency and buy now, pay later are exciting newcomers, but don't forget about the established giants in the space. Whether it's outperforming the market or collecting income, American Express, Mastercard, and Visa are the ideal stocks for any long-term investor.
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