Owning a piece of the credit card industry has turned out to be a very lucrative business for those investors who have had a long-term eye on the sector. If you review the quarterly holdings of Berkshire Hathaway Inc. (NYSE: BRK-A), one of the first things you will notice is that Warren Buffett, the Oracle of Omaha, keeps building up his stakes in the credit card industry.
American Express Co. (NYSE: AXP) was roughly the same stake at more than 151 million shares. This number of shares has been static for years, and Buffett began acquiring American Express shares back in the 1960s. It turns out that 2015 so far has been a very difficult year for American Express, but Buffett doesn’t have to care.
While American Express remains one of the top four Buffett holdings by far, the reality is that the new portfolio managers have continued to accumulate shares of Visa Inc. (NYSE: V) and MasterCard Inc. (NYSE: MA). There is a reason that Visa is now among the newest Dow Jones Industrial Average (DJIA) components, and the Buffett angle is merely a coincidence at this time.
Let’s start with American Express since it has been in the Buffett holdings forever. His stake of over 151 million shares has been static for years now. It represents a 14.65% stake, which makes Team Buffett the largest single holder of the DJIA component by about threefold. When we identified it as one of Buffett’s greatest investments of all time, the adjusted share price was under $45 — and now shares are closer to $80, and they were down from a peak in the past year of above $96.
The long and short of the matter is that Buffett and his portfolio managers have a massive cushion here. They simply do not care about the drop right now — and the stake is worth about $12 billion, even after the pullback.
So, what is going on with Visa and MasterCard over at Berkshire Hathaway? Buffett and his team are continuing to accumulate these shares. The reason is simple: credit card and debit card use keeps rising and is expected to only rise for years and years into the future. Cash still exists, but it is getting replaced.
Apple Pay, the latest from Apple Inc. (NASDAQ: AAPL), is only one facet of the evolution of this trend. The fears initially were that Apple, and other smartphone players, might try to cut Visa and MasterCard out of the game they have led for years. It turns out that it is better to work with them rather than to try to replicate their business history.
The latest 13F filing from Berkshire Hathaway showed that the stake in Visa Inc. (NYSE: V) was a larger one yet again, at 2.509 million shares as of December 31, 2014. This was up from 2,146,290 in the previous quarter, and it has grown from 1.555 million shares last March. MasterCard Inc. (NYSE: MA) was a larger stake yet again as well. That was 5.399 million shares as of the end of 2014, higher than the 4,715,400 shares in the prior quarter, and it was up from 4,050,000 shares last summer.
Some investors might wonder why Buffett is not an owner of Capital One Financial Corp. (NYSE: COF) or Discover Financial Services (NYSE: DFS). There is an obvious reason Buffett and his minions chose Visa and MasterCard to accompany the stake in American Express. That is simply that there are effectively little to no credit risks of Visa and MasterCard, while Capital One and Discover do have credit risks. Buffett already has customer credit risk via his American Express stake.
Buffett’s stake in Visa is worth close to $680 million and the stake in MasterCard is worth close to $500 million. That is more than $1.1 billion, but still a fraction of the $12 billion stake in American Express.
Buffett and his portfolio managers obviously want a larger foothold in the financial transaction game. The goal now is one of owning the toll road rather than owning the risk side of the business. By owning the firms that clip a portion of each transaction rather than owning the banks issuing the credit cards, the risks already get lower. Buffett already is knee-deep in bank stocks, which give him backdoor access to the risk side of the credit card consumer risk.
Now comes the question of whether Buffett can get Visa, MasterCard and even American Express to seek higher dividend payout ratios. Imagine if Buffett and his portfolio managers decide ultimately to own much larger stakes in Visa and MasterCard.