When looking for strong stocks, of course, it is important to assess the fundamental characteristics and consider the capabilities of the issuing company in the light of current (and, if possible, future) macroeconomic trends in industry and economy. But what can sometimes make a stock stand out from the crowd is its competitive advantage. It is usually because of this advantage that the figures on the financial statements of such companies look good enough at any stage of the market cycle.
In particular, two financial stocks such as Mastercard (NYSE: MA) and S&P Global (NYSE: SPGI) have the advantage that they have long-term success and will support them in the future. It might not hurt to learn a little more about these two companies.
1. Mastercard: Plays in its own league
There is a reason Mastercard has been one of the most successful players over the past decade, with an annualized return of almost 32% through 2020 and an average profit growth of around 16% per year. This is because in the niche the company occupies, it has practically no competitors. Along with Visa, Mastercard is part of a duopoly in the lending industry. These two companies process billions of transactions per day and own 90% of the credit and debit card market.
There are other players though, namely American Express and Discover. But they both have slightly different business models – they act as banks and also lend money to their credit card holders. As lenders, these companies take on the credit risk associated with lending. Mastercard and Visa simply process payments through their vast networks, generating income from the fees paid for every transaction made with their cards. There is much less overhead here, which generates huge profits and huge cash flows to invest in new technologies, expand opportunities and reach.
One of the recent big Mastercard purchases was Finicity, a fintech that allows users to connect their bank accounts to other payment apps. This gives Mastercard another advantage – a huge influence in the growing field of open banking. “With the addition of Finicity, we expect not only to advance our open banking strategy, but also to improve our position in several other markets.”– said the president of Mastercard, Michael Meebach, in a press release on the acquisition of Finicity. The company is also expanding, introducing cryptocurrencies into its network and thus striving to follow current and emerging trends in this area.
Mastercard will also benefit from the continued phase out of cash transactions as the world gradually moves towards digital and contactless payment formats. The way people pay and send money will certainly undergo some changes over the next decade, but with its vast network and powerful brand, Mastercard is likely to remain at the forefront of this industry.
2. S&P Global: Leader on several fronts at once
The killer advantage of S&P Global is that the company is a leader in not one, but two of its markets at once. This is why it has been so incredibly stable over the years. Its share price has not had a negative annualized return since 2008. In addition, S&P Global is one of the so-called dividend aristocrats and has been increasing its annual dividend for 48 consecutive years – another testament to its stability and longevity.
S&P Global has four main lines of business, two of which are already market leaders, while the rest are growing steadily. The well-known business of the company related to the credit rating is the largest source of income, accounting for about 48% of revenue. S&P is one of the three largest rating agencies with a market share of 40%. Moody’s also owns about 40%, while Fitch’s share is about 15%.
In addition, S&P Global is also the market leader in the index business. The company manages all S&P indices including S&P 500, as well as Dow jones industrial average as part of a partnership. As with the credit rating business, the S&P is one of the few big players in the index business. The company collects fees from the companies included in the indexes for listing, and in addition has a certain income from licensing agreements with exchange-traded (ETF) and index funds.
In addition, S&P has a market analysis business – the company provides data and research to investment professionals. It accounts for about 28% of revenue. Finally, the company has Platts, the leading market data resource for the energy and commodities industries. Both of these businesses are subscription based.
These four segments provide an excellent combination of income, the businesses that make up the company complement each other and provide stable income over different market cycles. When one segment falls, the other rises; which is why S&P Global hasn’t had negative annualized returns in over a decade.
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