Leverage: The Key to Expansion for Payment Processors
Payment Processors Expect to Grow in 2016: How Will They Do It?
Increased leverage
Payment processors (XLK) have increased leverage for organic as well as inorganic expansion. Leverage has also increased on share repurchases as prices declined in the second half of 2015 and 1Q16. Visa (V) took on a debt of $16 billion to partially fund its acquisition of Visa Europe. The company has a debt-to-equity ratio of 55%, which is higher than the industry average of 40%. Notes are issued at fixed rates of interest ranging from 1.2% to 4.8%, with maturities between two and 30 years.
Visa had cash and equivalents and available-for-sale investment securities of $24.8 billion as of December 31, 2015. The company expects significant startup costs for setting up domestic operations in China.
MasterCard (MA) has a debt of $3.3 billion with a total balance sheet of $16.2 billion as of December 31, 2015. This compares to $15.3 billion in 4Q14. In 2015, the company generated free cash flows from operations of $4.0 billion compared to $3.4 billion in the previous year. The company had total cash and equivalents and liquid investments of about $5.7 billion as of December 31, 2015. The company’s leverage increased with long-term debt rising from $1.5 billion to $3.3 billion in the fourth quarter of 2015.
American Express on reduction
American Express (AXP) generated a return on equity of 24.0% in the fourth quarter of 2015 compared to 29.1% in the prior year’s quarter. The company’s risk-based capital ratios were comfortable, with a Tier 1 ratio of 13.5% and Tier 1 divided by risk-weighted assets at 12.4%. The company’s total assets rose by $2 billion to $161 billion in 4Q15 compared to 4Q14. However, its long-term debt fell to $48 billion in 4Q15 compared to $58 billion in the prior year’s quarter.
Discover Financial’s (DFS) borrowings stood at $24.7 billion in the December quarter compared to $22.7 billion in the prior year’s quarter. The company has a high net debt-to-equity of 1x.
In the next part of this series, we’ll see how payment processors are rewarding their shareholders.
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