Visa Inc (V), And How This Can Assist Mastercard Inc (MA)

One of the most important economic stories of the last five years is the decline in consumer debt burdens. Called “deleveraging,” household debt has plunged from its peak in 2007 as consumers defaulted on loans that never should have been made and paid off what they could. As a percentage of household income, debt payments are now at the lowest level since Ronald Reagan’s first term.

The numbers are impressive enough, but we have to ask: What can we do with them? What companies might they benefit?

One is Mastercard Inc (NYSE:MA).

Here’s the story.

Mastercard Inc (NYSE:MA) has an incredible card-processing business, sharing a virtual duopoly with rival Visa Inc (NYSE:V). Mastercard Inc (NYSE:MA)’s operating margin has averaged 49% over the past five years. Return on equity has averaged 43% since 2009. Try to find other large-cap companies with similar metrics. You’ll struggle.

The financial crisis barely nicked Mastercard Inc (NYSE:MA)’s business. Since 2008, payment volume — the total amount of transactions processed — has grown an average 9.1% per year, and the number of transactions processed grew an average of more than 11% per year. Remember, this was during one of the worst financial disasters in recent memory. It’s phenomenal performance.

But what I like most about MasterCard is where it’s been somewhat weak. That’s where the opportunity lies.

Mastercard Inc (NYSE:MA)’s debit card business has boomed for the last five years. But credit card transactions have been a drag on growth — a consequence of deleveraging, which pushed consumers away from credit cards:

Source: Company filings.

But there’s good news. With debt deleveraging coming to an end, the weight on MasterCard’s credit card division should ease. And that could make its already-phenomenal results that much better.

U.S. credit cards make up 15% of Mastercard Inc (NYSE:MA)’s total volume. If that segment returns to 8% growth — equal to nominal GDP growth plus a small amount of “releveraging” as consumers begin borrowing again — a full percentage point of growth could be added to MasterCard’s purchase volume.