Perhaps more than anything else, the theme here on this site is that great things can happen to your financial life if you can separate the headlines and stock prices from the actual business performance of the company, and then methodically strike when an opportunity arrives for you to take advantage of the low prices in the moment.
I’m not just interested in this stuff in the abstract; I like to focus on real, specific companies and discuss what it means to be a value investor in real time. Over on Seeking Alpha, I have written about how value investing in this day and age takes you in the direction of the ultimate hold-your-nose stock Citigroup, as the company’s book value is $65 per share and the current stock price is in the $40s. Because banking stocks inevitably end up trading at premiums (premia?) to book value, you can act with a high degree of likelihood that once the central bank gives Citigroup the clearance to start raising its dividend for the first time since the financial crisis, its stock price will start increasing significantly as well. But that’s neither here nor there, I want to talk about credit card stocks today.
This the question I want to review: What did the business performance of Visa, Mastercard, and Discover look like during the financial crisis, and what were the range of opportunities presented to the long-term investor?
In 2008, Visa made $2.25 in profit, and paid out $0.21 in dividends. From 2008 to 2009, though, the stock price fell from $89 to $41. But were the economics of the business deteriorating? No. In fact, Visa was actually doing something unusual: they were growing throughout the entirety of the financial crisis, and raising their dividend to boot (this is one of many reasons why Visa is often referenced as the ideal long-term investment alongside Coca-Cola and Johnson & Johnson). In 2009, Visa earned $2.92 in profit and raised the dividend to $0.44 per share.
You didn’t have to get in at the bottom to be a success. Someone who looked and thought, “Oh my God, the stock price is plummeting, but the business is actually growing” would have been in the middle of making a life-changing insight. Someone who realized that and acted upon it, at say $60 per share, would not only have seen the price rise to $210 per share in the summer of 2014, but would have collected $5.70 in total cumulative dividends along the way. A few moves like that can change a life.
Mastercard, while not as obvious as Visa because the dividend was held steady at $0.06 per share from 2008 through 2011, also followed in Visa’s footsteps in a significant way: the core business grew throughout the financial crisis. Even though Mastercard’s stock price fell from $32 per share in 2008 to $12 per share in 2009, the business itself grew profits from $0.90 per share to $1.12 per share. You saw annual profit growth of over 20% during the worst moment in America’s financial markets in almost a century. Someone who got in at, say, $20 per share would be sitting pretty as the price has now rebounded well over $70 per share, and the dividend is starting to come to life as the $0.06 dividend in 2011 has grown to $0.44 in 2014.
Discover Financial, meanwhile, did not present the obviously successful business performance during the financial crisis that you saw from Visa and Mastercard. In fact, Discover Financial’s business performance got downright scary right as its stock crashed. The price plunged from $32 per share to under $5. The dividend got slashed from $0.24 annually to $0.08 annually. The profits fell from $1.10 per share to $0.10 per share. To say the least, this was not an easy investment if you had to make a decision right there in the moment. Even though profits per share have come roaring back to the $5 mark, the only way you could have realized this at the time would be if your thesis was “Even in this disastrous environment, Discover is still making $53 million in total corporate profits. The Discover brand means something. The economy will someday recover, and given the price under $10 per share, this seems like an intelligent speculation.” That would have taken a lot of skill and boldness to pull off, but here’sthe fun thing: it wasn’t necessary to figure Discover out to be a successful investment; you could have put together an excellent record for yourself by seeing Visa and Mastercard’s growing profits during the crisis and invested accordingly.
If you had acted on Visa, Mastercard, and Discover during the financial crisis, you would have done extraordinarily well during the next five years. It was the kind of situation where $30,000 invested into equal parts of each could have grown into $110,000 now, depending on what your introductory price looked like. But you didn’t have to catch them all. Every dollar put into Visa or Mastercard could have multiplied into three, four, or five dollars, depending on how you played it. Someone with that same $30,000 that put it all into Visa would have still ended up with at least $90,000 today. There’s a lot of money to be made if you harness this skill; someone who can identify companies where there is a disconnect between growing profits and a falling price, and is able to develop the backbone to actually act upon it, will be fine over the long term; if he or she is not rich already, it is inevitably a matter of time before he or she becomes so.
Originally posted 2014-07-21 08:00:48.
