Wednesday, September 24, 2014

New Stock Purchase in my Portofolio

Hey All!

So, as I continuation to my previous post I am here to share with you where I allocated some of the free cash that ended up in my portfolio after my sale of Verizon (VZ) shares. As I previously mentioned- I am a long term investor which means that when I buy a stock I'd like to hold it for a very, very long time. However, circumstances do come about {such as changes in my original purchase thesis} and so, I do decide to make adjustments.

One thing I have learned in my journey of becoming a great investor (and this is an ongoing journey) is that just as we buy with a plan, we should also sell with a plan. Keep in mind that the plan can very well be keeping the money in cash until a new opportunity comes along (nothing wrong with that). However, if we already know of a good opportunity, it is probably a good idea to put our money to work as soon as we can. We work hard for our money and is nice to see it do the same for us.

And so, with that said, my portfolio has had a new member for about three months now and that new member is MasterCard (NYSE: MA).

So, why did I buy MasterCard? Well, I have owned shares of Visa for less than two years and the stock has been really good to me (up over 49% since November 2012). As most of us know, Visa and MasterCard are the two top leaders within the payment transaction industry. Although companies like American Express and even Discovery have done well for themselves for a very long time; the truth of the matter is that their popularity and frequency of usage is not nearly as repetitive as Visa and MasterCard. I encourage you to pull out your wallet right now and see which icons are most frequent within your cards. I can almost guarantee that most of your cards either have a V or an MA logo on it.

There are so many reasons why I feel strongly about a company like MasterCard but to save you time, I will narrow it down to the three main reasons why I decided to purchase shares:

1. The way the company makes money- Explaining how a transaction processing company makes money can get complex. However, in a nutshell-- every time you swipe your credit or debit card that has the MasterCard logo in it; the MasterCard company gets a fee from the merchant from said transaction. Hence, the more times customers swipe their cards to buy pretty much anything, the more money MasterCard gets from said merchants. According to a 2012 study by; nearly 75% of Americans 18 and over admitted to having at least one credit card. Two years later, I can only deduct that number is likely higher. In this day and age, using plastic is almost a necessity that goes beyond the convenience but it is now required for online purchases of pretty much any kind.

A transaction processing company (which is where MasterCard and Visa fall under) is NOT a bank. Hence, their credit risk is virtually zero. They are not concerned with whether or not you pay your credit card bill at the end of the month or whether you have bad credit or anything of the sort. Their only concern is that you use your card to make purchases. They make it convenient for merchants to get money from customers as most people rarely ever carry cash now a days. Once that swipe goes through; the responsibility of collecting payment lays with the bank that provided the credit card in the first place. Transaction processing companies do not get involved with any of that.

2. A ridiculously high operating margin- First of all, operating margin in simple terms is the amount of money that stays with a company for every dollar of sales (before interest and taxes are deducted). For the twelve months ending June 30th, 2014; MasterCard's operating margin is at 54.8%.This means that for every dollar they make from their operations, they get to keep over 50 cents. If this is not a sign of an exceeding profitable company, I don't know what is.

3. A sustainable business model with not much competition- Although many can argue that the popularity of companies like PenPal or other methods of online payment can threaten the bottom line of companies like Visa or MasterCard; I strongly believe that we have a long way to go before that becomes a real threat. The reality is that most people prefer to use their cards for nearly everything they do. From purchasing something at the corner store all the way to booking a vacation on the internet. Hence, I see a lot of room for continuous growth. Not to mention that there are many people that still that haven't switched from using cash to cards (even if this is now a minority). Sooner or later, I can picture a world where cash will be a thing of the past and companies like MasterCard or visa will continue to benefit greatly. They also continue making investments in research and development to make sure they keep ahead of technological trends in this area.

Bonus--- Dividends? Yes MasterCard does pay their shareholders an annual dividend yield of 0.60%, or 0.44 per share. The yield is not as high as other companies in my portfolio and lower than Visa's which pays $1.60 per share on an annual basis. However, this is an area where I can see increases year over year.

What are your thoughts on companies like MasterCard?

Thank you for reading, and cheers to profits!