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I have covered both companies in multiple posts with the most recent being:
The primary purpose of this post is to disclose the purchase of additional shares in my largest (V) and second-largest (MA) holdings. On September 2, I acquired another 50 V shares @ $223.7699/share and 100 MA shares @ $340.3929/share.
My rationale for making these my two largest holdings is that I have always thought the trend toward various forms of cashless payments in the ever-expanding global economy will benefit both companies over the long term.
Visa and Mastercard - Long-Term Outlook
Some think V and MA become increasingly vulnerable to heavy losses if credit card delinquencies escalate. Such is not the case. Neither company is exposed to such losses. It is the card issuers with V and MA branded cards that are exposed to credit losses.
In addition, V and MA are expanding their product offerings to capture new business. Credit cards are of little use to a huge segment of the global population. These people, however, need reliable forms of payment that reduce their risk of fraud and other forms of criminal activity.
Investors might have some concern that V and MA are at risk since significant and rapid technological change is occurring in the global payments industry. Such changes include mobile and other proximity and in-app payment technologies, ecommerce, tokenization, cryptocurrencies, distributed ledger and blockchain technologies, and new authentication technologies such as biometric.
V's Press Releases and MA's Investor News clearly show the extent to which both companies are investing in their respective businesses to stay at the forefront of the payments industry.
I would much rather invest in V and MA which have a better grasp of how these technological changes will impact the global payment industry than invest in companies that are developing this technology.
Furthermore, I refuse to invest in cryptocurrencies. In my opinion, value is about the intrinsic values of the cash flow in a discounted cash flow analysis. If something does not have cash flow, it must have a very strong probability of being able to be converted into a cash flow stream at some point in time.
Some assets in this world do not fit this characteristic (eg. cryptocurrencies). Since they have no intrinsic value I, therefore, do not view them as assets.
Visa and Mastercard - Risks
Far too often, investors approach an investment solely from the perspective of the potential reward. Investing, however, is akin to a coin in which one side is 'return' and the other is 'risk'.
The 2 broad types of risk are 'systematic' and 'unsystematic'.
Systematic risk applies to an entire market or market segment; all investments have an element of systemic risk. Examples of such a risk include but are not limited to:
- government collapse;
- risk of war;
- risk of inflation; or
- macro risks such as the COVID-19 pandemic or The Financial Crisis.
It is extremely difficult to protect investments against these un-diversifiable risks. This is why it is important to focus on the underlying quality of the investment and to gauge the extent to which the investment can sustain a 'macro shock'.
Unsystematic risk, however, is specific or diversifiable risk. Such risk is unique to, for example, a company or a particular industry and can be mitigated through portfolio diversification.
Within these two types of risk are:
- Political Risk;
- Country Risk;
- Interest Rate Risk;
- Legal Risk;
- Reinvestment Risk;
- Market Risk;
- Foreign Exchange Risk;
- Inflationary Risk;
- Credit Risk (also known as Default Risk).
Each company's 10-K has a section that discusses the key risks. Every investor should review this section before investing in any company.
Visa and Mastercard - Credit Ratings
I look at the credit ratings assigned by the major rating agencies to reduce one risk aspect of my investment; I typically limit my investments to those in which the unsecured domestic long-term debt credit ratings are investment grade.
V's current ratings and outlook are:
- Moody's - Aa3 (stable)
- S&P Global - AA- (stable)
MA's current ratings and outlook are:
- Moody's - A1 (stable)
- S&P Global - A+ (stable)
All ratings are investment-grade with V's ratings being the lowest tier of the high-grade category. MA's ratings are one notch lower and are the top tier of the upper-medium grade category.
The ratings define V as having a VERY STRONG capacity to meet its financial commitments and differ from the highest-rated obligors only to a small degree.
MA's ratings define it as having a STRONG capacity to meet its financial commitments. MA, however, is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
These ratings are acceptable for my conservative nature.
Dividend and Dividend Yield
Looking at V's dividend history (the Class A shares are publicly traded) and MA's dividend history, we see a steady increase in the dividend distribution; the anomaly in MA's dividend history is attributed to the 10 for 1 stock split.
V also had a 4 for 1 stock split in 2015 but V has adjusted its dividend history to reflect the impact of this split.
Both companies typically have a sub 1% dividend yield which likely leads to many investors overlooking both companies as potential investments.
Every investor has different goals and objectives so if an investor needs to maximize the dividend income generated from their investments, I can appreciate why they may overlook these companies.
I, however, prefer to look at an investment from a total potential return perspective.
As much as I like receiving dividend income, I prefer that a company retain funds if they can be used to generate superior long-term investor returns.
Another consideration I factor into my investment decision-making process is taxes. I incur a tax obligation when I receive dividend income. Whenever possible, I prefer to defer my tax obligation as long as possible.
Making matters worse, as a Canadian citizen, I incur a 15% withholding tax on dividend income received from US holdings held in taxable accounts.
Given my long-term outlook for both companies, I have no qualms about their razor-thin dividend yield and expect the majority of my return to be derived from capital gains.
In the 10-Qs and 10-Ks for both companies, we see they actively repurchase shares (refer to their respective Consolidated Statement of Cash Flows - V's FY2020 10-K and MA's FY2020 10-K). This is also borne out from the reduction in the Diluted Weighted-Average Shares of Common Stock Outstanding found in their respective Consolidated Statement of Operation.
Visa and Mastercard - Valuation
There is no disputing V and MA are richly valued. These are, however, not companies in which you expect to see low valuations. This is because of their growth potential.
V's share price is currently ~$226. FY2021 - FY2023 guidance from the brokers which cover V is:
- FY2021 - 32 brokers - mean of $5.82 and low/high of $5.69 - $5.93. Using the mean estimate, the forward adjusted diluted PE is ~38.8 and ~38.3 if I use $5.90.
- FY2022 - 35 brokers - mean of $7.26 and low/high of $6.85 - $7.83. Using the mean estimate, the forward adjusted diluted PE is ~31 and ~29.3 if I use $7.70.
- FY2023 - 24 brokers - mean of $8.60 and low/high of $8.01 - $9.60. Using the mean estimate, the forward adjusted diluted PE is ~26.3 and ~24.3 if I use $9.30.
MA's share price is currently ~$342.50. FY2021 - FY2023 guidance from the brokers which cover MA is:
- FY2021 - 32 brokers - mean of $8.13 and low/high of $7.86 - $8.47. Using the mean estimate, the forward adjusted diluted PE is ~42.1 and ~41 if I use $8.35.
- FY2022 - 35 brokers - mean of $10.65 and low/high of $10.00 - $11.45. Using the mean estimate, the forward adjusted diluted PE is ~32 and ~30.6 if I use $11.20.
- FY2023 - 24 brokers - mean of $13.10 and low/high of $12.30 - $14.09. Using the mean estimate, the forward adjusted diluted PE is ~26 and ~24.8 if I use $13.80.
Visa and Mastercard - Added to My Largest Positions - Final Thoughts
Despite their respective rich valuations, I intend to hold shares for the very long term and fully expect their value to be far greater many years into the future.
Should the share price of either company experience another sharp drop as they did on September 2, I can always acquire additional shares.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long V and MA.
Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
