Investors often turn to Warren Buffett-led Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) for insight on market gyrations and top stocks to purchase now.
And while Berkshire’s portfolio has seen its justifiable share of changes over time, one theme that has stayed constant is the emphasis on the financial sector through Berkshire’s public equity portfolio and its insurance businesses.
American Express(NYSE: AXP), Visa(NYSE: V), and Mastercard(NYSE: MA) are owned by Berkshire Hathaway and are all 3% or less off their all-time highs. Here’s why all three dividend-paying growth stocks could have more room to run in 2025 and beyond.
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Berkshire’s American Express position dates back to 1991, making it one in every of his longest holdings together with Coca-Cola. In 2024, American Express gained a whopping 58.4%, making it the third best performing component within the Dow Jones Industrial Average — behind only Nvidia and Walmart.
The epic return in American Express, paired with Berkshire trimming positions in top holdings like Apple and Bank of America, has pole-vaulted American Express to Berkshire’s second largest public equity holding behind Apple.
American Express makes up 15.9% of the portfolio in comparison with just 0.9% for Visa and 0.7% for Mastercard. But again, the American Express position is so large because Berkshire bought the stock at a drastically lower cost over 30 years ago — not because Berkshire has added to American Express in recent times.
American Express operates a closed-loop payment network, which is a noticeably different business model in comparison with open-loop payment networks for Visa and Mastercard.
American Express issues its own cards, giving it more control over merchant fees and interest income. By comparison, Visa and Mastercard work with banks to issue cards. Each corporations profit from network effects and a growing global reach. The thought is to get cards into the hands of as many consumers as possible and have them use those debit and bank cards for as many purchases as possible, with Visa and Mastercard passing along the credit risks to the banks in exchange for the advantages of their processing networks.
In sum, the essential difference is that American Express advantages from interest income on outstanding card balances, whereas Visa and Mastercard depend on transaction fees.
Each business models have their pros and cons. But because American Express issues its own cards, it’s the next revenue, lower margin business model than Visa and Mastercard. As you’ll be able to see in the next chart, American Express makes roughly the identical amount of revenue as Visa and Mastercard combined but has far lower profit margins.
American Express sports a $220 billion market cap in comparison with $482 billion for Mastercard and a whopping $619 billion for Visa. Over the past five years, American Express has produced a complete return (including dividends) of 154% in comparison with 95% for the S&P 500, 67% for Mastercard, and 62% for Visa. But zoom out over the past decade, and American Express is the worst performing of the three corporations — with a 314% total return in comparison with 434% for Visa and 562% for Mastercard. Granted, all three corporations beat the S&P 500 over that period.
The only reason why all three financial stocks could possibly be great buys, even now around their all-time highs, is that they feature elite business models and reasonable valuations. American Express has a forward price-to-earnings (P/E) ratio of just 20.5 in comparison with 28.6 for Visa and 32.3 for Mastercard. But again, it sports lower margins and has a more complex business model.
At first glance, all three corporations have yields too low to think about worthwhile income stocks — with only a 0.9% yield for American Express, 0.7% for Visa, and 0.5% for Mastercard. However the low yields result more from outperforming stock prices than an absence of commitment to returning capital to shareholders, especially once factoring in stock buybacks.
Over the past 10 years, all three corporations have drastically increased their dividends while buying back a boatload of shares, making earnings per share grow faster than net income.
Only a few corporations can afford to boost their payouts and repurchase shares at such a torrid rate. And there is reason to imagine all three corporations should have the ability to proceed this pattern for years to come back.
Network effects and the transition from money to digital and mobile payments are a long-term boon for these corporations. Visa and Mastercard, particularly, are also recession-resistant. Each corporations might even see a dip in spending per transaction, but the quantity of transactions may stay near the identical even during a recession. So, earnings ought to be less cyclical in comparison with other financial corporations.
Financials were the second best performing sector in 2024 — behind only communications. Big banks are helping lead the sector to all-time highs and have higher dividend yields than payment processors. But given the lower cyclicality of the payment processors, they could be higher buys for some investors.
Buying equal parts of all three payment processors is an affordable alternative for investors who’re latest to the industry. Nevertheless, you might wish to do your personal research into each company to seek out out which one stands out as the most effective option for you.
Visa is my top pick of the group. In actual fact, it’s one in every of my favorite Buffett stocks, together with Coca-Cola and Chevron. Nevertheless, all three corporations would profit from sustained economic growth and lower regulations, which could help maintain and even increase fees in the approaching years.
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Bank of America is an promoting partner of Motley Idiot Money. American Express is an promoting partner of Motley Idiot Money. Daniel Foelber has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Chevron, Mastercard, Nvidia, Visa, and Walmart. The Motley Idiot recommends the next options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Idiot has a disclosure policy.
