Take Visa over Mastercard, this portfolio manager says

They’re both good investment options in today’s economic climate, says portfolio manager David Driscoll of Liberty International Investment Management, but Visa (Visa Stock Quote, Charts, News, Analysts, Financials NYSE:V) gets the edge over Mastercard (Mastercard Stock Quote, Charts, News, Analysts, Financials NYSE:MA). 

“Visa tends to be a little bit more mature but they tend to have greater accessibility to what’s happening in the future as far as payments are concerned. And they really started to pick up as the world reopened again, more so than Mastercard, with all of the traveling that people started to do,” said Driscoll, CEO at Liberty International, who spoke on a BNN Bloomberg segment on Friday.

Payments and the fintech space in general have been faring rather poorly over the past 12 months, with a number of macro issues factoring in. Rising key interest rates are making borrowing tougher for fintech companies and while the boom in e-commerce activity seen over the first stretch of the pandemic was golden for digital payments companies, deceleration in growth in online commerce in more recent months has been more of a drag on earnings. 

How bad are things looking? Companies like PayPal and Block Inc (formerly Square) are down by over 60 per cent since last September, while the Global X Fintech ETF, which tracks the global fintech space, is down by about half over the same time frame.

The drop has been less dramatic for Visa and Mastercard. For Visa, the stock hit a high of $250 last July and has since fallen off to now around $200 per share. Mastercard is also down, going from around $390 last July to now around $330. 

Visa recorded solid top and bottom line beats in its latest reported quarter, the company’s second quarter fiscal 2022, delivered in late April. Net revenue was up 25 per cent to $7.2 billion, with payments volume, cross-border volume and processed transactions all showing positive growth. Visa’s Q2 profit was up 27 per cent to $3.8 billion and adjusted EPS was up 30 per cent to $1.79 per share. Analysts had been calling for revenue of $6.83 billion and EPS of $1.65 per share.

“We had a very strong quarter amidst the invasion of Ukraine and our decision to suspend operations in Russia, with GAAP EPS up 23 per cent and non-GAAP EPS up 30 per cent. The Omicron variant impacts were short lived and the global economic recovery that began in the middle of last year continued,” said Chairman and CEO Alfred F. Kelly, in a press release. “While the geopolitical environment remains uncertain, we expect continued growth driven by a robust travel recovery and through the enablement of traditional and newer ways to pay globally.”

Driscoll said the environment for payments is improving, with the return of travel being a big factor.  

“If you use your Canadian dollar Visa overseas on a trip then that foreign exchange charge of six and a half per cent is pure gravy to companies like Visa or MasterCard, so that’s where their earnings started to pick up in the last quarter as people started to break out of their houses and start traveling again,” Driscoll said.

“Between one or the other they both trade at very lofty multiples. They’re very similar in nature, but we own Visa in our portfolios just because they have a little bit more global reach relative to Mastercard,” he said.

Both Visa and Mastercard come with small dividends, with Visa yielding about 0.8 per cent and Mastercard at about 0.6 per cent. Visa has also been kind to shareholders of late through its share buyback program, whereby the company bought $2.9 billion of its own stock over the fiscal second quarter. 

For Mastercard, the company saw its revenue climb 24 per cent on a year-over-year basis in its most recently reported quarter to $5.1 billion, while adjusted net income was up a full 55 per cent to $2.7 billion or EPS of $2.76 per share. Cross-border volume grew by 53 per cent year-over-year to lead the way, with the company saying its March numbers for cross-border travel were above 2019 levels for the first time since the pandemic began and came in ahead of management’s expectations.

“We continue to make good progress against our strategic priorities, deepening relationships with key issuers and co-brand partners across the globe. We’re seeing strong traction in consumer and small business payments, Mastercard Installments and our work across the digital asset space,” said Mastercard CEO Michael Miebach in an April 28 press release.

For Driscoll, the choice between the two is not so important but what is a big concern is to avoid owning both Visa and Mastercard. 

“You do not want to have correlation risk in your portfolio. If both [stocks] go down they’re going to go down at the same rate,” Driscoll said. “If you think back to 2008, the market fell 40 per cent  and it wasn’t one Canadian bank that fell 40 — they all did. And all that does is multiply your losses.”

“Correlation risk is the biggest destroyer of capital that you can have, so it’s important to choose one or the other,” he said.