Get Paid Like a Government
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has been said that wealth goes to wealth. Whether you subscribe to theories such as those posited in Think and Grow Rich, The Secret and other such books or not, it is true that there are many ways to "tax" everyday transactions. Everything from a fee for processing the paycheck of an everyday worker to skimming a little off the top when someone goes out for dinner can put money in your pocket. Like a government, you can profit without having to do work simply because you enable someone else to make money. But you don't need to start a revolution and chuck tea into a harbor. All you have to do to get paid like a government is own the following companies.
Every knows eBay (NASDAQ: EBAY) as an online retailer where people sell each other just about anything you can think of. But many people forget that one of eBay's main revenue generators is Paypal, the payment processor and escrow service the company bought in 2002. But selling your old tools, dolls and cars on eBay isn't the only way Paypal takes in those tasty fees. It also gets paid whenever an online contractor receives payment. As one of the largest and most secure online payment methods in the world, Paypal keeps eBay rolling in fees every time an online web designer, freelance writer or other contractor receives a payment through the service. EBay's primary moat is its overall simplicity and functional relationship with Paypal, but its moat is even deeper because of a superior quality brand. EBay's net 2011 income of more than $3.2 billion also doesn't hurt.
One of Fifth Third Bancorp's most successful spinoffs has been Vantiv (NYSE: VNTV), which originated in 1973 but only went public in March of 2012. As the largest debit payment processor in the US, Vantiv helps small and medium sized businesses earn income and save money at once. Because this company's business model is based on helping smaller, faster growing companies instead of forcing people to "toe the line" like many credit card processors do, it is far more sustainable and has much greater upside potential. Vantiv is even more sustainable because its business model is proactive about cultivating relationships with businesses that use its services. Vantiv's moat is that it is exceptionally large, and it takes this moat even further by working with smaller and medium size businesses, which are known to have extraordinary growth potential. With Vantiv's 15% operating margins on $1.6 billion of revenue in 2011, this is also a company with a strong cash position.
Not many people have heard of Digital River (NASDAQ: DRIV), but they should. As one of the larger and more globally focused ecommerce solutions providers, Digital River profits from nearly every part of any given company's sales funnel. From offering web analytics and hosting online stores all the way through providing payment processing and multilingual customer support, this is a company that allows you to get a piece of every stage of the action that's happening all over the world. Digital River's moat consists of having a unified, one stop shop for helping other businesses grow their sales. This level of convenience tends to lead to high retention levels, which in turn keeps revenue and profit margins steady. Considering that Digital River has maintained $100 million per year of free cash flow on $400 million revenues for a couple of years now despite cooling demand as the digital services market matures, this is a company in a solid cash position.
But even when people just go to work, they can pay you. You may have heard of Paychex (NASDAQ: PAYX), the payroll processing and HR outsourcing company that deals with over half a million small and medium sized businesses. How would you like to get paid every time a worker clocks in for another day's toil and grind? How would you like every employee's paid vacation to also pay you? Because Paychex takes care of HR and payroll functions that are not core operations in most companies, Paychex's moat is that so many companies depend on it for keeping track of their workers. In this case, being established and having huge volume adds a substantial buffer of safety. Also not terribly shabby is the fact that Paychex has doubled its free cash flow since 2003, which is projected to be $617 million in 2012.
While Vantiv and eBay don't currently pay dividends, Digital River and Paychex do. And even without dividends directly paying you, each of these companies can pay you with capital appreciation.
In a sense, you can almost act like a government. While you can't make laws, you can vote at the annual shareholder meetings. And while you can't start wars, you can impose a "tax" on transactions that happen every day.