Mastercard, Visa, and Cash

By David Talley - May 25, 2012 | Tickers: MA, V | 0 Comments

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Mastercard (NYSE: MA) and Visa (NYSE: V) are both dominant players in the electronic payment space. Deciding which company is best for your portfolio can be difficult; however, when judged on share-holder friendliness, to me there is a clear winner.

One criteria I look for before investing in a company is whether the company's management runs the company with shareholders in mind. In practice, I evaluate a company on its capital allocation practices. Companies that return excess cash (some of a company's cash is needed to grow/maintain the business) to shareholders via buybacks and dividends I consider friendly, while companies that are in constant acquisition mode I consider unfriendly (while acquisitions can bring value to shareholders, the majority fail to do so). By examining Visa's and Mastercard's financials, we can determine which company is friendlier to its shareholders.

Dividends

A quick look shows Visa and Mastercard yielding .74% and .29%, respectively. Digging deeper we find Visa's payout ratio is nearly three times that of Mastercard's (20.5% to 7.5%). Lastly, we look at the growth rate of each company's yield. Over the last three years, both Visa and Mastercard have at least doubled their dividends (Visa from $.42 a year to $.88; Mastercard from $.60 to $1.20). However, the way in which the companies increased the yield is also important. Visa raised their dividend steadily over the time period while Mastercard doubled their dividend this past quarter. Over time, compounding will benefit the slow and more frequent raise over the less frequent "catch-up" raises.

It is clear that Visa has had the superior dividend policy, having both a higher yield and payout ratio and increasing the payout more frequently and at a higher rate. However, before declaring a victor, we must consider buybacks.

Buybacks

Since 2009 both Visa and Mastercard have been active in the markets, buying back shares of their companies. Visa spent around $5.4 billion in the market to reduce its shares outstanding from 846 million to around 814 million today (a reduction of around 3.8%). Similarly, Mastercard spent just over $1.3 billion to reduce its share count from 129.77 million to 126.38 million (a reduction of 2.6%). Although Visa is again the victor, the trend in buybacks appears to favor Mastercard. After being a net issuer of share in both 2009 and 2010, Mastercard spent $1.1 billion on buybacks in 2011 and is on pace to spend a comparable amount in 2012. Only time will tell if Mastercard is committed to this level of buyback in the future.

While Visa has proven itself willing to return capital through buybacks, Mastercard looks like it's playing catch up.

Closing Thoughts

While both Visa and Mastercard generate large amounts of free cash flow, Visa has historically returned more of its cash to shareholders. However, as an investor we must look toward the future, and Mastercard's historical shareholder neglect provides two modes of thought moving forward.

Because Mastercard's return of cash to shareholders has lagged Visa's, Mastercard now has close to $41 per share in cash and is trading at just over 10 times cash. Visa, on the other hand, is trading just under 33 times cash. If you believe Mastercard's recent buyback attempts and dividend raise are indicative of a change in Mastercard's attitudinize toward returning cash to shareholders, then Mastercard should return more cash to shareholders than Visa over the next few years. However, if you believe history is the best indicator of future actions, Visa is the company to own. Mastercard's management left the cash-question up for debate on their most recent conference call, saying that the cash could be used for buybacks or acquisitions.

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