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3 Stocks to Cash in on Higher Consumer Borrowing This Year

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Per the recent Fed report, consumer borrowing picked up 10% in May. This increase of $35.28 billion was well above the market forecasts of $18.4 billion. In March and April, consumer credit grew 5.5% and 5.7%, respectively.

The components of total borrowing, which consist of non-revolving and revolving credit, were up 9.5% and 11.4%, respectively. Non-revolving credit includes auto and student loans while revolving credit captures spending on service sector.

Borrowing Jumps

This jump in consumer borrowing is the highest one-month gain in five years. As of May 31, 2021, consumer credit outstanding was $4.235 trillion. The recent data shows that consumers are now using their credit cards more frequently than in the past. This is clearly driven by pent-up demand, rising consumer confidence, higher spending ability plus a better jobs scenario, all led by an improving economic scenario. In 2020, spending on cards was weak as economic uncertainty and restriction to stay at home forced a cut in the buying capacity.

Credit Card Usage Here to Stay

This reinvigoration in consumer borrowing is here to stay, boosted by the prevalent optimism. With respect to growth in consumer borrowing, economists perceive that revolving credit will gather steam in the months ahead. This will be fueled by consumer consistency in spending on services, which they were bereft of last year, such as travel and recreation, dining out and entertainment, et al.

This growth in credit card spend will benefit those companies that are present at different nodes of the whole ecosystem, involved right from the issuing of cards until the final payment is made. The main entities involved in the credit card business are banks and payment processors. While banks gain from annual fees and other charges as customers use credit cards, payment processors gain from processing fees every time a card is swiped or used to make a transaction. Against this backdrop, we will choose a few companies that are poised to capitalize on the current scenario.

Our Picks

Visa Inc. V: This name is sure to strike you with the very mention of a debit or a credit card. This is because it is the leading payment processor followed by Mastercard Inc. MA. Though it does not issue any card, it just facilitates the payment via its payment network. In 2020, the company processed 140.8 billion worth of transactions on its network, which is spread across the globe, and this number has only been rising over the years.

The company’s high-tech payment infrastructure, brand name security, reliability as well as partnerships with merchant and banks position it strongly to gain from the rise in credit It is leading the pack among the payment facilitators to allow crypto transactions in its network. The company is allowing customers to make their transactions in USD Coin (USDC), a stable coin powered by the Ethereum blockchain, and intends to add such coins to its settlement platform. Visa’s strategies are clearly set to achieve long-term growth. Year to date, the stock has gained 8.5% against its industry’s decline of 7.3%.

The stock carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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American Express Co.’s AXP credit cards are much sought after by its high profile and affluent user base. The company is sure to gain from the rise in revolving credit growth as its cards mainly target travel and entertainment categories. American Express Platinum cards provide lounge, concierge and other luxury services along with other rewards. Recently, the company relaunched its Platinum card to make it more lucrative for customers.

The company is doing brisk business, evident from buoyant demand for new cards. In the first quarter of 2021, it issued two million new cards for the first time since the beginning of the pandemic. The company shows solid prospects at present. The stock has surged 39.8% so far this year compared with its industry’s growth of 12.4%.

The stock presently carries a Zacks Rank #3 (Hold).

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Capital One Financial COF is a big issuer of credit cards and generates nearly 60% of its revenues during 2020 in the form of interest and swipe fees. Although it was hit last year due to a pandemic-led slump in its biggest line of business, now things look brighter for this fifth-largest credit card issuer in the United States.

Its Walmart partnership and the 2017 acquisition of Cabela's Incorporated’s credit card operations bode well for its credit card business. Strong growth opportunities in card loans and purchase volumes are also expected.

The company is also in good financial shape with manageable debt and a strong debt-servicing capability. The stock has soared 55% so far this year compared with its industry’’s growth of 41.6%

The stock carries a Zacks Rank of 3, currently.

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Mastercard Incorporated (MA) : Free Stock Analysis Report

Visa Inc. (V) : Free Stock Analysis Report

Capital One Financial Corporation (COF) : Free Stock Analysis Report

American Express Company (AXP) : Free Stock Analysis Report

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