Visa Inc (V), Mastercard Inc (MA): 3 Compelling Reasons to Buy These Credit Card Stocks

During recessionary or stagnant times, financial institutions generally don’t do well. But it’s almost the opposite scenario in the payment-services industry.

For instance, despite the sovereign debt crisis in Europe, shares of Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) appreciated by 38% and 22.5%, respectively, last year. Now that the major economies around the world are showing signs of recovery, I believe that there is still a significant upside in store for both Visa and MasterCard, despite their high valuations.

Passing the buck

In a bid to lure more merchants, Visa Inc (NYSE:V) and MasterCard recently allowed US retailers to pass on transaction charges generally reserved for merchants to customers. This will certainly boost Mastercard Inc (NYSE:MA) and Visa’s acceptance among US retailers and should offset any decline in credit card usage. According to recent data, credit card checkout fees are as follows:

American Express Company (NYSE:AXP) has not yet allowed changes to the surcharge, and I don’t see it coming either. American Express provides services to the rich, a demographic that often makes huge transactions. Besides the hefty $450 annual fee, passing along a 2.9% surcharge on big transactions could gravely affect the company’s credit card usage and put pressure on the company to boost its rewards program.

But the surcharge fees imposed by Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) are relatively smaller, and many retailers have already decided not to pass the fee along. This move comes as a bid to promote customer loyalty, but merchants are basically now free to pass the buck.

Investors delight

Visa has a $1.75 billion share repurchase program underway of which $1.1 billion remains. At the current market price, this translates to a pending repurchase of 6.9 million shares. Moreover, Visa pays out 27.5% of its earnings as dividends, and the current share buyback should reduce its dividend payouts by a tad over 1%.

Mastercard Inc (NYSE:MA) recently increased its share buyback program to $2 billion. Its previous buyback program of $1.5 billion has pending capital of $440 million, and the new plan will spring into action as soon as the previous $1.5 billion is exhausted. Its board also doubled the company’s quarterly dividend payouts, and the CMP shares of MasterCard yield approximately 0.5%.