This Company Is the Best Hedge Against Inflation
Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There's a heated discussion going on whether the massive money printing by the Fed will cause interest rates to rise, or whether now is a good time to buy treasuries after their prices crashed in the past two weeks. But there's one aspect where there's a general consensus in the markets. If the Fed continues with his purchase of $85 billion worth of treasury notes for much longer, the value of the U.S dollar will eventually evaporate. The combination of a zero percent interest rate environment combined with a government balance sheet loaded with debt is extremely lethal. But In times of cheap and easy money, there's one sector that does exceptionally well.
Who benefits from too much idle money?
Visa (NYSE: V) operates the world's largest retail electronic payments network and manages the world's most recognized global financial services brand. The great thing about credit card companies is that the financial institutions that license their brand do so on the basis of transaction volume. The more money people spend on their Visa-branded debit and credit cards, the more money Visa earns. You must understand that Visa doesn't hold any of the debt put on those cards. It merely licenses the brand and receives a fee for processing the transactions. All the fun, with no worries. That's why credit card companies are such a great business.
In other words, the more money that exists, the more money Visa will make. It's perfectly correlated to inflation. And I believe that Visa has the most to gain from inflation out of all of the credit-card networks.
A superior brand
Visa isn't alone in the credit card business. Its two very dominant rivals are MasterCard (NYSE: MS) and American Express (NYSE: AXP). I believe that in the long haul, Visa will outperform both of them for the following reasons.
Visa is the largest of the three, by far. At a market cap of $125 billion, Visa is three times the size of MA and AXP, combined. Just to get a feel for the numbers, last year Visa processed more than $3.8 trillion from more than 50 billion separate transactions. American Express processed only 5 billion transactions worth $808 billion. According to Visa's 10-K, the firm has twice the number of cards issued over MasterCard, its closest competitor, with almost 55% higher payments volume. Currently, Visa has more branded credit and debit cards in circulation than anyone else. More cards and more payment volume mean more profits.
While MA is exposed internationally to more than 150 countries, it's heavily reliant on the U.S. Roughly a third of its business comes from the U.S., which has the slowest volume growth out of any of the markets it services. AXP suffers even more because it's the biggest U.S. credit card issuer by customer spending. The majority of its business is U.S based. Visa, on the other hand, is well diversified globally, with no specific focus on the U.S consumer market.
AXP isn't growing, it's shrinking. It plans to cut 5,400 jobs this year, because profits declined by 42% in the fourth quarter. In contrast to AXP, MA is expanding. According to its most recent quarterly filing, net revenue is up over 7% since 2012 and operating expenses are up 5.5%. This translates to higher net operating income for MA. But Visa leaves both competitors way behind. In the last quarter, Visa increased its net revenue by a whopping 15%. That's especially remarkable for such a mega cap company.
The Foolish conclusion
If you believe that inflation, in some form, is bound to hit the markets then you must hedge your dollars. Visa is the ultimate inflation hedge - it's a giant global operator of cheap money across the world, it carries little transaction risk, and it's well diversified. Invest accordingly.
Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.
Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends American Express and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!