Credit Card Debt Management

Wall Street analysts are dubbing MasterCard (MA) and Visa (V) shares “recession-proof stocks.” It’s no secret that these two companies have shown a solid performance. Despite the roller coaster stock market, especially in the financial sector, these two stocks have remained relatively stable.

Visa has already more than doubled its IPO price of $44 a share in mid-March of this year. Its IPO also enjoyed a record-setting take of $17.86 billion, first place in the history of U.S. domestic IPOs and third place among IPOs worldwide.

MasterCard, more veteran to the stock market scene than Visa, has been floating near or above the $300/share mark for a while. The company has $2.66 billion in cash and $229 million in debt, according to StreetSpeculator.com. The site further points out that Visa’s cash is more than twice that of MasterCard and the debt is less than half.

But what makes these two companies such buoyant choices in the violent sea of stock turmoil? No liabilities. Aside from legal disputes, something they’ve both just experienced, these two companies cannot be touched by the bad debt wreaking havoc on so many banks and other credit card companies like Discover, Capital One and American Express. Visa and MasterCard are safe because they do not make loans, they merely facilitate loans and purchase transactions. Their profit does not come from late fees and interest charges imposed on card-carrying consumers. They instead derive profit from fees imposed on banks who use their logo on cards and merchants who allow customers to pay for goods or services with their card.

It makes for a very “cash cow” stock choice, as StreetSpeculator.com puts it. July 31 is quarterly earnings report day for both companies — if profits exceed forecasts, the share values will likely soar and it could be a good day for stockholders indeed.

MasterCard (MA) shareholders are undoubtedly excited to see the stock’s performance this year, an amazing 45% increase thus far. On Friday, the stock hit a record high of $320.30 — more than double its 52-week low of $120 in August 2007 — before settling at $308.65 at the close of Friday trading. The good news came after the company reportedly announced its expectation of double-digit net revenue growth in 2008.

According to Thomson Financial News:

“The Purchase, N.Y.-based company said it continues to see gross dollar volume growth rate slowing in the U.S. in the second quarter, but growing in the rest of the world, according to slides from the company’s investor meeting Thursday. In the long-term, Mastercard said it expects average annual net income growth of 20% to 30% and net revenue growth of 12% to 15%, according to the slides.”

It might not the best entry-level point for newcomers to the MasterCard stock, but Visa (V) might be worth considering. It closed Friday at $86.36, up 1.11% from the day before and almost double its IPO cost of $44 a share in March. That’s remarkable growth and still a relatively reasonable price per share, considering the respectability and stability of the Visa corporation.

Both Visa and MasterCard are considered relatively stable investments for a couple reasons. Other than the fact that we live in a credit-obsessed society and these two companies stand among the industry giants, they also have a great business model. Unlike the banks and competing credit card companies AmEx and Discover, Visa and MasterCard don’t stick their necks out with loans. All they do is collect fees off credit card transactions. Therefore, they have very little exposure to the bad debt so prevalent in these turbulent economic times.

In other credit card news, American Express (AXP) finished last week down 10.9% YTD at $46.35. Discover Financial Services (DFS) finished at $17.15, up 13.73% YTD. Capital One Financial Corp (COF) finished at $48.12, up 1.82% YTD.

The New York Police Department is telling victims of identity theft to keep their stolen credit cards open and active. From a financial advisor’s point of view, this would sound like the worst possible advice. However, from a detective’s perspective, it becomes much easier to track down the thief.

As might be expected, the plan is meeting with some resistance, according to the New York Daily News:

“‘Nobody trusts credit card companies or banks, so no one really believes they won’t be on the hook for some crook’s spending spree,’ said a Manhattan lieutenant familiar with (NYPD Deputy Commissioner of Operations Phil) Pulaski’s push to reduce grand larcenies.”

NYPD officials are saying they will attempt to work with credit card companies to gain a commitment for the companies to pick up the tab. It’s an “investment,” they say, well worthwhile in light of catching a thief run amuck. However, there is a mixed reaction in the credit card world as well. Visa, MasterCard and American Express stated that a consumer would never be expected to foot the bill for a criminal’s spending spree, even if the card was left open under the advice of law enforcement. However, Capital One spokesperson Diana Don had the following to say:

“We might be responsible for the expenses. We want to work with law enforcement to stop such thefts. It would be on a case-by-case review.”

This story still doesn’t answer the common complaint of law enforcement officials — jurisdiction. Might we assume that the feds would get involved in this effort as well? By many accounts, credit card fraud and identity theft often becomes an international issue, so that may be necessary. At any rate, it’s nice to see law enforcement officials trying to take a solution-oriented approach, even if it is still in the idea stage.