We Just Bought Visa (V) and Mastercard (MA) for DTA’s Income Builder Portfolio

My 8-month-old grand-twins, Logan and Jack, have a lot of similarities: cuteness, curiosity, blue eyes, solid builds, doting parents, and too many other things to list here.

They are not identical, though.

Their heads are shaped a little differently; Logan (on the left in the photo above) has a small birthmark on his forehead; Jack has a pronounced cleft in his chin (he got that from his dad, who got his from me).

Over the months, I’ve learned other ways to tell “LoJack” apart, too.

The world’s dominant electronic-payment “twins,” Visa (V) and Mastercard (MA), also are not quite identical.

Both are large, publicly traded, technology corporations that issue credit cards through banks — rather than directly to consumers as American Express (AXP) and Discover (DFS) do.

Mastercard and Visa do not need to worry about lending money or operating as banks themselves, because they earn most of their money through service and data processing fees.

It’s a brilliant business model.

The main difference between Visa and Mastercard is they do not structure their fees quite the same.

Also, Visa generated about $6 billion more revenue than Mastercard in 2019 — though both companies’ products can be used just about anywhere.

One other difference: As I showed in my previous article — in which I revealed that I had selected both companies for our Income Builder Portfolio — Mastercard has been the better stock investment the last decade.

Will Mastercard’s outperformance continue? Within the IBP, we’ll get a real-time, close-up view.

On Tuesday, April 21, I initiated purchase orders on Daily Trade Alert’s behalf for about $500 worth of each stock — thereby splitting DTA’s $1,000 biweekly allocation.

Visa buy took place over 2 transactions just seconds apart, as sometimes happens with limit orders.

Not Much Income Incoming

I also own V and MA in my personal portfolio, and I regard their dividends as little more than tiny bonuses.

Visa’s dividend yield is 0.74%, and Mastercard’s is 0.65%.

After Tuesday’s purchase, V and MA immediately became the IBP’s two smallest income producers by far. (See our entire 33-stock portfolio HERE.)

As currently sized, these positions will combine to generate only about $7 in annual dividends (red circle in graphic below).


Though the dividends are small, shareholders can rest assured that the payments will be made every quarter and will increase every year.

Thanks to outstanding free cash flow and low debt, MA and V both have what Simply Safe Dividends considers extremely safe payouts (blue circle above).

Both companies also have been aggressive in growing their dividends, as shown by the green-circled percentages in the image above as well the data in the graphics below.

 The top graphic shows Visa’s year-over-year dividend growth, the bottom Mastercard’s. The figures in the last column account for dividends expected to be paid in 2020. (Schwab.com)

Analyze This!

Those who follow the market for a living are bullish on both companies.

Thirty-three of the 37 analysts surveyed by Thomson Reuters give Mastercard either a Strong Buy or Buy rating.

Meanwhile, Visa is rated either Strong Buy or Buy by 32 of 34 analysts.

CFRA analyst Chris Kuiper expects both stocks to experience significant price appreciation in the coming year.

Valuation Station

Just as I love my adorable LoJack, shareholders have found these twins easy to love — because Mastercard and Visa have crushed the market by a mile.

Nevertheless, it’s not been easy for many value-conscious investors to buy V and MA, as the stocks are almost always overpriced by most traditional metrics.

It’s quite common for both to have price/earnings ratios in the 30s — and sometimes even in the 40s.

The red-circled areas in the following FAST Graphs illustration show that Mastercard’s normal P/E ratio over recent years has been about 27; it’s even higher now.

Same thing for Visa — a norm of 25.6 vs. a current P/E ratio of 30.5.

Despite that, V and MA very well could “grow into” their valuations. The yellow-highlighted areas in the above images indicate that after earnings dip this year (due to the economic effect of the coronavirus pandemic), they again are expected to start growing more than 20% annually in 2021.

That kind of metric has Morningstar analyst Brett Horn believing that neither V nor MA is overvalued now.

Both companies are amazing generators of free cash flow, and if one uses FCF as the principle metric, one can make an attractive case for Visa.

Not only is Visa’s P/FCF of 31.5 right in line with the company’s norm (red-circled areas), but FCF is expected to increase substantially beginning in 2021. (Mastercard, on the other hand, looks pricey even using FCF as a measuring stick.)

Wrapping Things Up

In the decade from 2010 through 2019, Visa and Mastercard each grew EPS by more than 450% and FCF per share by more than 500%. Sales approximately tripled for each.

Yes, these credit-card twins sure have grown like crazy.

V and MA are not the kind of higher-yielding, slower-moving companies that populate many Dividend Growth Investing portfolios — including the IBP.

Personally, I believe a DGI practitioner always can find room for a few super-high-quality “growthier” stocks, and I welcome Mastercard and Visa to the Income Builder Portfolio.

— Mike Nadel

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