Visa (V) and MasterCard (MA) are the two lowest yielding positions in our dividend growth portfolio, both yield under 1%. We think they will be the two companies to grow their dividends the fastest.
They both have low payout ratios that they can increase.
Neither needs to reinvest a lot of capital back into their business which leaves more to return to shareholders.
Both Visa and MasterCard have dominant payment networks that should allow them to generate excess returns on capital well into the future.
Electronic payment adoption and migration to Visa’s and MasterCard’s networks still has a lot of growth left in it. Even in developed markets like Europe.
On June 9, the second tranche of European payments regulation begins, creating a multiyear earnings catalyst for MasterCard and Visa. New merchant routing provisions will enable MasterCard and Visa to negotiate directly with retailers to process their domestic transactions for the first time. For context, regional networks in markets such as Cartes Bancaires (”CB”) in France and Girocard in Germany currently process nearly all domestic card transactions. Such networks dominate their local payments market by setting local payments routing rules, but upcoming European payments regulations replace these rules. Such presents an opportunity for MasterCard and Visa to accelerate European processed transaction growth.
Large retailers could lead share shift to Visa and MasterCard. Visa and MasterCard can entice international retailers to re-route domestic transaction processing away from local networks, such as CB and Girocard. After June 9, retailers with pan-European operations could further consolidate multi-country agreements with global networks such as Visa and MasterCard. This to negotiate better volume-based processing rates, organize joint marketing programs, and create a globally consistent consumer payment experience. For context, pan-European retailers represent a substantial portion of the overall French market, and 9 of the top 10 French retailers.
Also, Visa and MasterCard are far ahead of the local European networks in regards to tokenization. As payments move from physical cards to smartphones and digital wallets, the security tokenization offers is vital. If European retailers want to offer Apple Pay, which relies on tokenization, then they need to be on a payment network that can handle it.