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The payment sector has been one of the most attractive areas to invest in. This reflects the profitability of the market leaders and the growth of digital payments.
In August 2019's Master Investor Magazine I have taken a look at the payment sector.
MIAug2019PaymentSector - PDF article download
Three payment giants
The three largest-listed payment groups are Visa, MasterCard and PayPal. They have all delivered in spades for investors. This highlights that some of the best investments are the brands that we use everyday.
Visa was listed at US$11 (adjusted for splits) in March 2008 and currently trades at US$168. MasterCard listed at US$3.9 (adjusted for splits) in May 2006 and currently trades at US$257.
PayPal was spun-off from eBay in July 2015 and started trading at US$40. The online payment group currently trades at US$104.
All three companies are listed in the S&P 500 Information Technology sector. They are not exposed to credit risk or interest rate risk.
Valuations at close on 5th August 2019
The S&P 500 closed 6% lower on 5th August 2019 than the record high of 3,025.86 it reached on 26 July. While this is a modest decline it has made stock valuations more attractive.
Below are the current valuation outlooks for the three payment groups based on their share prices at the close on 5th August.
Visa (V) - The first card payment network ($168.86)
Visa's financial year-end runs to September and the group recently reported third quarter earnings. Revenue and adjusted net income both increased by 11% on a year ago. Adjusted earnings per share increased by 14% to US$1.37.
Visa is forecast to increase revenue by 11.2% in the current financial year. Revenue is forecast to increase by 11.3% in fiscal 2020 and 11% in fiscal 2021. Margin improvements and ongoing share buy backs will both bolster earnings per share.
Visa key forecast ratios
Visa trades on a forecast free cash flow yield of 3.9% for the fiscal year to September 2020 and 4.5% in the following year. Both figures appear to be attractive given the quality of the business and its long-term growth prospects.
A key feature of the Visa investment case has been ongoing share buybacks. In the nine months to June 2019 the group spent US$6.5 billion buying back 43.8 million class A shares.
The P/E ratio Visa trades at against the last 12 months reported earnings recently hit 40X. This is above the recent average of around 30X. However, the forecast P/E for the fiscal year to September 2020 is currently 27X.
Visa's P/E ratio on historic earnings
Visa share price since IPO
MasterCard (MA) - The second card payment network ($256.87)
MasterCard has a normal calendar financial year and is expected to grow at a slightly faster rate than Visa. Revenue in 2018 increased by 19.6% and it is forecast to increase by 12.5% in 2019.
The free cash flow yield is forecast at 2.8% in 2019, 3.5% in 2020 and 4% in 2021.
MasterCard valuation and financial ratios
MasterCard share price since listing
PayPal (PYPL) - a consumer online payment brand (US$103.6)
PayPal is the fastest growing of the three companies but also generates the lowest margins. The shares have fallen 14.6% on the back of mixed Q2 results and the current market weakness.
With strong cash conversion PayPal is trading on a forecast free cash flow yield of 3.4% for 2019, 4.1% for 2020 and 4.9% for 2021.
PayPal share price since IPO