Although the method is different, credit card companies offer the age-old service of money-lending. Western consumers have an obsession with quick and easy credit. We are moving to a cashless society and credit cards offer the ultimate in consumer convenience. They allow customers to quickly purchase items and delay payment until they are ready to pay at a later date. Of course this comes at a cost; the interest rate. Credit card companies make lots of money off of consumers, and you can take advantage of this by investing in credit card companies.
Credit cards have revolutionized the way the world does business. So, how can you profit from the credit card industry? When evaluating and investing in credit cards, it’s important for investors to look at the following criteria. Here are things that credit card investors should watch for:
Consumer Confidence
Government Regulation
Revolving Credit
New Technology / Mobile Payments
Late Payments
Interest Rates on Late Charges
Credit Card Companies
Here is the summary of the four major credit card companies. None are big dividend payers but you’ll see that they all have a decent growth pattern below.
Name
Ticker
Price
EPS
P/E
PEG
Market Cap
Dividend
Yield
Payout Ratio
VISA
V
$176.67
$5.80
30.45
1.30
114.00
$1.32
0.75%
22.76%
MasterCard
MA
$636.62
$24.19
26.31
1.33
79.75
$2.40
0.38%
9.92%
American Express
AXP
$73.35
$4.07
18.01
1.33
79.13
$0.92
1.25%
22.60%
Discover Financial
DFS
$48.59
$5.13
9.47
1.05
23.54
$0.80
1.65%
15.59%
VISA, Inc. – V
VISA is the largest credit card payment processor in the world. VisaNet is one of the most advanced payment processing systems on the planet. Visa has great business model, they (along with MA and AXP) can be compared to a toll-booth operator. They collect fees every time a debit or credit card with their name on it gets swiped. The beauty of credit cards is that Visa does not issue the cards, set interest rates, or extend credit to consumers. That risk is shouldered by the banks themselves (like Chase or JPMorgan). VISA just collects fees on transactions.
VISA operates in more than 200 countries making it a large conglomerate providing international diversification. After establishing its business as Bank Americard in 1958, it changed its name to VISA in 1976 one year after the debit card was introduced. It handles a total of US$ 6.7 trillion in transactions in a year. How many pay a fee?
Related: International Diversification
MasterCard Incorporated – MA
MasterCard has been around since 1966 but did not go public until forty years later. It operates another large mobile payments network. Like Visa, MA does not issue credit or cards directly to consumers. MA has issued a dividend since it went public, and it’s interesting to note that the company has steadily raised the dividend every year since then. Although AXP and DFS have better yields, MA looks like it has the potential to be a dividend champion.
MasterCard has VISA beat on the international front with 210 countries The dividend increases are not very consistent. They were flat for a few years and then they doubled during the past 2 years. MasterCard was created in 1966 as Interbank Card Association (ICA) and later renamed MasterCard in 1979.
American Express Company – AXP
Another large payment processor, American Express is the granddaddy of them all. Established in 1850, it does not issue credit or cards directly. AXP claims to handle more purchase volume per day than its competitors. Amex unfortunately does not have much of a dividend history, it has only paid them since 2011.
The Amex is present in 130 countries. I would consider 130 countries a good international diversification A Costco favorite by the way. If you are a big Costco fan, this might be a good play on the Costco angle. It’s also a worthy investment for Berkshire Hathaway. It is however, the least performing stock of the group at the moment.
Discover Financial Services – DFS
Discover is a bit different than the others. It issues cards in addition to offering traditional banking services like checking, savings, CDs, money market accounts, and a variety of consumer loan products. It also serves as a credit card payment processor like V or MA . Discover operates the familiar PULSE payment network as well as the old-school Diner’s Club International brand. Discover sports the highest dividend yield on our list, but it’s only paid out since 2007.
A reduction in dividends was made in 2009 and none of the others reduced their dividends. It’s a sign that dividend might not be a commitment… It does however have the highest yield and the best growth over the past 5 years. DFS is a very recent played established in 1986 and through its Diners Club International it does business in 185 countries.
ETFs or Mutual Funds
Investors who want to invest in card companies but reduce risk might want to consider a more diversified product like a financial services ETF or mutual fund. Credit card companies are part of the financial services industry, but would not be a pure play. An ETF or sector fund like the Financial Select Sector SPDR – XLF will have banks and other financial services companies mixed in.
Thoughts on Credit Cards as Investments
Just like we invest in utilities to profit from our demand on energy, we could invest in credit card companies to profit from our payment behaviour evolution. Think about it, how many purchases have you done with a credit card compared with a bank card or cash? The incentives are all there to use the credit card with all the point systems. I have a total of 3 credit cards in my wallet at all time. Each for its own purpose (and I ALWAYS pay them in full). I have 2 more that I need to close down after getting them to get a juicy discount. If you are not keen on investing on a specific credit card company, you can always invest in a financial institution as part of their profit is also generated from credit cards.
Credit card companies are relatively new companies when you compare them with Coca-Cola (KO) or Johnson & Johnson (JNJ) so it will take time before we see them on a Dividend Aristocrat list but they are worth paying attention to. The business of credit cards companies is also a number game based on the number of clients they can acquire. That’s why I reflected on the numbers of countries they operate in. The more countries they are present, the more customers they can have and the more interest payments they can get. Regulations alone can limit some of the profitability… How much regulations can put put in place for bad financial decisions though … There are limits to protecting citizens from themselves
Readers: What do you think of the credit cards for your portfolio?
Image courtesy of ddpavumba / FreeDigitalPhotos.net
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