Which New Consumer Payments Technology Will Prevail? Why It Matters Little to Visa, MasterCard

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Wall Street is keenly interested in the electronic payments industry these days, viewing the rise of smartphone payments at registers and similar cashless transactions as the new growth industry. But with many, many of those transactions, whether through Square or Google (GOOG) Wallet or even eBay’s (EBAY) PayPal, one of two very big, old-fashioned companies makes money: MasterCard (MA) or Visa (NYSE:V). Investors in these two companies, each with great track records of shareholder returns, get exposure to the fast-gaining trend without those messy new-tech issues.

Visa and MasterCard are still growing at double-digit rates annually, despite the fact that they already are the two most popular credit cards on earth. Both companies just announced big share repurchase plans, and MasterCard doubled its dividend. Both companies' dividend yield remains well under 1%, but the big gains in the share price have left shareholders with little reason to complain, as seen in a stock chart.

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MA Chart

These companies are not banks. The resilience of their shares throughout the country’s lingering recession speaks to the fact that they have no exposure to bad loans. While American Express (AXP) and Discover Financial Services (DFS) make money in part from interest payments, Visa and MasterCard get paid in fees. New regulations capping certain debit card fees have had little impact on either company’s bottom lines, as they simply made up the difference by raising other fees.

Both companies stand to gain from the nifty new technology that encourages us to charge even our $1.79 coffees to debit and credit cards. But that’s just a small symptom of the broader trend that gives these big companies a lot of room to grow. Better illustrations of their growth opportunities come from MasterCard’s roll-out of pre-paid cards with the largest retailer (a grocer) in East Africa, and a similar program with a card for buses in South Africa. It’s the more general trend from cash to cashless transactions, even with old-school cards in places where little of the population uses banks, that gives these companies such potential.

Which one is best? For arcane reasons, MasterCard did get more of the debit card business than Visa as a result of the new regulations, but it’s a mixed blessing as that kind of business comes with a narrower profit margins. Visa still runs the majority of all credit card transactions. Shares of the two companies tend to trade in tandem, at unsurprisingly high PE ratios.

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MA Forward PE Chart

Analysts are generally positive on the shares. But UBS has maintained a sell rating on both companies since the middle of last year, mainly because their shares are vulnerable to consumer spending trends, and consumers haven’t been overly optimistic in this weak economic recovery. The share prices of both companies have shot to all-time highs since then, which perhaps makes them more vulnerable.

While MasterCard and Visa stand to gain from those smartphone-enabled purchases, their fortunes are hardly dependent on them. Nor are they dependent on the buyer’s ability to actually pay for whatever he just purchased. They don’t necessarily have to convince people to spend more money to grow. They simply have to persuade people to replace cash with their cards. There’s still an awful lot of cash out there to convert.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.


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