Analysis: Visa, MasterCard earnings turn plastic into cash

By Maria Aspan

NEW YORK (BestGrowthStock) – Transaction processors Visa Inc and MasterCard Inc are both huge, predictable cash generators that are ready to return more money to shareholders by buying back shares.

Yet the world’s two largest credit and debit card networks are skimping on their dividend payouts.

Visa and MasterCard escaped the worst of the financial crisis with billions of dollars each in unrestricted cash, and analysts expect their piles to continue growing. Both have spent some of that money on acquisitions this year, and each recently committed to $1 billion in share buybacks.

But the two networks have some of the smallest dividend yields — 0.7 percent for Visa and 0.3 percent for MasterCard — among companies with big stockpiles. MasterCard in particular could pay its dividend 27 times over based on its forward cash flow, according to Thomson Reuters data.

“I would like to see increased dividends. It would be a way to differentiate themselves especially versus other financial services, because many of the banks are unable to increase their dividends,” said Matt McCormick, portfolio manager with Bahl & Gaynor, who owns Visa shares.

Both Visa and MasterCard “have the ability” to increase their payouts in the next year, McCormick said. But he is more optimistic that Visa, which raised its dividend by 20 percent in October, will do so again.

MasterCard has not raised its dividend since 2007. Spokeswoman Jennifer Stalzer said in an email that the company is “committed to return cash to our shareholders if we don’t reinvest it back into the business, with a current preference for share repurchases over dividend increases.”

Some investors are hesitant to demand immediate dividend increases in the midst of ongoing regulatory and legal uncertainty. Both companies are awaiting U.S. rules that could restrict their profits. They are also facing a long-simmering merchants’ lawsuit over their processing rules and fees.

MasterCard, which went public two years before Visa, is as a result more exposed to the lawsuit and needs to reserve more cash against a potential settlement, analysts said. Both companies also need to keep some cash at hand to backstop their bank partners through technological glitches, although those reserves are much smaller than the stashes at banks.

But once the regulatory and legal clouds clear, most shareholders are expecting a reward for their patience.

“Until we get some clarity behind these regulatory issues, the prudent thing for them to do is to hold tight,” said Michael Nix, principal at Greenwood Capital Associates, which owns Visa shares. “Once that clarity’s there and we understand the financial impact, you can clearly assess what they can afford to do to.”

Jim Tierney, chief investment officer of money management firm W.P. Stewart, called the companies’ recent stock buyback plans “absolutely appropriate” and said he prefers that type of return to an increased dividend.

“Once you start a dividend policy, you’re really locked in to that. It’s not one of those things you can fall back on” if conditions worsen, said Tierney, whose firm includes MasterCard and Visa shares in its $1.5 billion of assets under management.

Still, “as you move forward, as you get more clarity,… Both companies have room, and I would expect them to increase their payouts or their dividend yields,” he said.

POTENTIAL PAYOUTS

MasterCard’s dividend yield is at the bottom of the list of the 25 richest dividend-paying U.S. non-bank and non-insurance companies, based on those companies’ net cash piles, according to StarMine. Visa, which has an even bigger net cash position than MasterCard, has its dividend tied for third-lowest of those companies.

Banks and insurers’ cash reserves are considered separately because they need to keep much bigger cash reserves on hand as a matter of course.

Visa and MasterCard, which process credit and debit card payments, do not take on credit risk and were relatively insulated from the 2008 financial crisis. Their businesses have grown as the economy stabilizes and consumers spend more.

Visa reported about $3 billion in profit on $8 billion in revenues for its fiscal year ended in September. The world’s largest card processing network is sitting on about $3.87 billion in unrestricted cash and cash equivalents — compared with about $2.48 billion at rival MasterCard — and it should keep piling up.

“They are in very strong cash positions, partly because they generate a ton of cash and they don’t have a ton of use for that cash,” said Sanjay Sakhrani, analyst at Keefe, Bruyette & Woods. “That’ll grow as earnings grow.”

READY TO SPEND

Neither is sitting idly on its stockpiles. Visa spent $2 billion on e-commerce processing company CyberSource in July and the next month MasterCard bid $520 million for similar European firm DataCash.

“There are a number of new technologies coming along … and both companies want to make sure that they’re in all the places around the globe,” Tierney said.

The companies’ efforts to buy or develop new technology comes as consumers are increasingly shopping online or even using their mobile phones to buy things instead of using traditional credit and debit cards.

Both are also trying to grow in emerging markets, where most consumers still use cash and checks instead of plastic.

(Reporting by Maria Aspan, editing by Gerald E. McCormick)

Analysis: Visa, MasterCard earnings turn plastic into cash