Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Mastercard Inc (MA), American Express Company (AXP): Does Visa Inc (V) Deserve to Be in the Dow?

Page 1 of 2

The Dow Jones Industrial Average is well-known for its stability. The committee charged with making decisions about its makeup tends to be extremely conservative in implementing changes. Nevertheless, yesterday’s six-company switch in the Dow represented the average’s biggest shift since 2004, prompting investors to question whether the replacements really earned their place on the blue-chip index.

Visa Inc (NYSE:V)

The addition of Visa Inc (NYSE:V) introduces a new element to the Dow. Although the average has had its fair share financial-industry stocks over the years, the way in which Visa makes money is fundamentally different from how banks and more traditional financial institutions earn profit. Moreover, with groundbreaking changes to the payment-processing business on the horizon, Visa Inc (NYSE:V) could look a lot different in the years and decades to come. Let’s take a closer look at the card company to see whether Visa Inc (NYSE:V) truly deserves to be in the Dow.

Credit without credit risk
The easiest way to tell that Visa Inc (NYSE:V) is different from most financial companies is to look at a chart of its performance during and since the financial crisis of five years ago. The card company certainly took its lumps along with most of the rest of the stock market, but in comparison to many of the banks that actually issue its cards, Visa Inc (NYSE:V) held up quite well and has posted strong gains during the ensuing recovery.

V Total Return Price Chart

V Total Return Price data by YCharts.

The reason is simple: Visa takes on no credit risk in facilitating card-based transactions. Bad lending practices and high default rates punished card-issuing banks during the crisis, but Visa Inc (NYSE:V)’s small cut that it collects through transaction-based merchant fees was never put at risk. The slowdown in spending activity during the recession hurt its transaction volumes, reducing its profit. But not having the potential for outright losses from operations gives Visa a fundamental business-model advantage over lending institutions.

Will Visa’s leadership last?
From an industry-leadership standpoint, Visa is the logical choice among card companies. According to Visa’s 2012 annual report, the card company had almost double the number of total cards issued that rival Mastercard Inc (NYSE:MA) offers, and both its payment volume and its total transaction volume have similar advantages. Moreover, Visa dwarfs current Dow member American Express Company (NYSE:AXP). Unlike Visa and Mastercard Inc (NYSE:MA), though, AmEx does issue its own cards and therefore does retain the credit exposure that produces so much of its profit.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!