5 Credit card stocks to buy now
The rules of the game have changed for credit card companies. As of February 22, 2010, new federal legislation went into effect which puts a whole host of constraints on the industry. One of the biggest new rules included in The Credit Card Accountability, Responsibility and Disclosure Act (a.k.a. the CARD Act) include restrictions on imposing so-called “universal default” charges, a practice that had credit card companies going through a client’s financial records and penalizing them with higher interest rates for making late payments even on unrelated bills.
Other changes include a requirement to give clients 45 days written notice before raising credit card interest rates; a virtual ban on retroactive rate hikes; new marketing restrictions; new minimum payment disclosure requirements and no fees for paying your bill online or by telephone. And while this is seemingly bad for credit card companies, there is a flipside to this CARD.
The flipside to this CARD
According to a study by the Pew Charitable Trust, the new rules will save consumers at least $10 billion. Yet interestingly, the CARD Act fails to restrict credit card companies from imposing additional fees to new and existing customers, and raising interest rates to all customers across the board, and not just to those who meet certain criteria. In fact, the average credit card interest rate for the most credit worthy consumers now is 13%, and that is two percentage points higher than it was time last year.
I applaud the efforts to protect consumers rights, but I also know that consumers around the globe will continue using credit cards en masse to buy what they need. I also think that higher fees and higher interest rates will be a net positive for the bottom line of the following 5 credit card stocks you need to buy right now.
American Express (AXP)
This is the “Mr. International.” and travel-related services giant in our five-pack of credit card winners. American Express’s motto, “Don’t leave home without it,” is particularly poignant, as well as extremely useful in today’s global economy. The company is the global leader in the “closed network” credit card space, meaning it’s an actual card issuer similar to a bank, and different from the open network players that we’ll see in just a moment. American Express makes the bulk of its money on card fees and the interest rate charged on unpaid balances—and as we’ve explained, these are two areas that will largely be unaffected by the CARD Act.
Capital One (COF)
Like American Express, Capital One also is a major global card issuer. The company recently acted just as we expected they would by raising the interest rate on some credit card clients before the new CARD Act rules went into effect. This move was seen as a sign of fear by some on Wall Street, including Goldman Sachs (GS), who recently downgraded COF shares from “Buy” to “Neutral.” And while a downgrade from Goldman is never a good thing in the short run, in the long run we think any weakness in the stock represents a nice buying opportunity in this credit card issuer’s shares.
Discover Financial Services (DFS)
Discover Financial Services is the parent of the Discover card, and though this credit card is rightly thought of as a credit card stepchild when compared to American Express, MasterCard and Visa, the company consistently rates highest in terms of customer loyalty and satisfaction. The brand remains on top of the credit card category in the 2010 Brand Keys Customer Loyalty Engagement Index for the 13th consecutive year. What this means is that Discover users already are very happy with their product, and that means that the new CARD Act rules aren’t likely to have much effect on DFS’s bottom line.
Now we’ve come to the first open-network player on our top-five list, MasterCard. This credit card company isn’t a card issuer, but rather a transaction processor. Sure, the banks and card issuers may have to continue adjusting to the new marketing and fee restrictions, but the money will still keep rolling in for MasterCard as it is largely immune from the CARD Act’s regulatory influence. And if the economy and consumer spending continues improving in 2010, look for more and more people to put those new purchases on their MasterCard.
Like MasterCard, Visa also is an open-network player. This credit card company also is primarily in the business of processing transactions and taking a portion of each transaction as its main source of revenue. And just like MasterCard, Visa is largely sheltered from the CARD Act’s storm simply because it’s not directly subject to the industry’s new rules. One additional positive here for both MasterCard and Visa is the profit potential from prepaid credit cards. Recently, an analyst from William Blair & Co. raised his profit estimates for both companies for 2010 and 2011, saying the increasing use of prepaid cards will boost profitability.
So, despite the new rules of the game for credit card companies, it doesn’t mean bad news for investors looking to profit from stocks in the sector. In fact, adding these five credit card stocks to your portfolio could mean a sizeable charge to the plus side of your bottom line.