Key points:
- Mastercard and Visa revenues are inflation protected
- They're a percentage of the nominal sum spent, so rise naturally with inflation
- But what about those antitrust investigations?
Mastercard (NYSE: MA) and Visa (NYSE: V) are two stocks that we could consider to be slam dunks to beat – or at least keep up with – inflation. If we think of matters purely on a cyclical basis this is probably true too. The difficulty with any claim of “slam dunk” is of course that nothing is ever purely and entirely cyclical – there are always structural changes of some size or another going on in the background.
As one analyst asked by a newspaper put it: “We asked ourselves: of all the stocks in the world, which are best positioned to see their revenues rise in line with inflation? Our answer: the credit card processors, Mastercard and Visa. ”
The reasoning being fairly obvious. Both Mastercard and Visa earn a percentage of the nominal value of the transaction. A rise in the nominal values of transactions is in fact what inflation is, so clearly, their revenues will rise in line with inflation. That would seem to solve the inflation protection problem entirely then. Either the American stocks of the UK quotations (LON: OQZO) and (LON: OR2Z) and we're done then.
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Except, sadly, nothing is ever quite that easy. Firstly, inflation is made up of a wider set of prices than just retail sales (which is what most credit card transactions are going to be about). Yes, OK, some people might try to put the rent on a card but possibly not student fees, medical care and so on – which are part of the wider inflation indices.
It's also true that Mastercard and or Visa could face different producer inflation rates than the consumer one which determines their revenues. They're not buying in the full range of goods and services from across the economy so their costs won't – accurately – reflect that wider inflation rate. As it happens, a good guess would be that this difference will widen the MA and V margins. Wages are running behind inflation presently, computing power has been falling in cost for decades now – a fair enough squint would tell us that those are the two major spending items which make up the Mastercard and Visa cost bases.
So, yes, we might well think that Mastercard and Visa are the ultimate slam dunk stocks to resist, or even beat, inflation. Their nominal income will, largely enough, rise with whatever the inflation rate is.
But that's to look only at the cyclical issues. There's also that possibility of structural change. There the issue is not so clearcut. There's a definite rumbling out there that the two of them have not just a duopoly but something close to a cartel. And the antitrust regulators are sharpening their knives to see whether there could be a slice or two taken off the gross margins through legal or market based action. We discussed this about Visa here.
One way – and not the only way, this is where the trading decision comes in – to think about this is that the inflation protection of the revenue stream happens now and keeps happing whatever else does happen. The antitrust work is going to take years if indeed it ever happens. But it might well be worth monitoring the politics of this to see if that last assumption holds.
