Mastercard’s High ROE Doesn’t Guarantee It’s the Better Buy Than Visa

Mastercard Incorporated (NYSE:MA) and Visa Inc. (NYSE:V) are both highly profitable payment networks, but their financial metrics tell different stories. As of October 5, Mastercard reported a trailing return on equity (ROE) of 241%, significantly higher than Visa’s 61%. This stark difference might suggest Mastercard is the better investment, but a deeper look at their balance sheets and share prices is necessary.

Both companies generate substantial profits without bearing the full cost of transactions they process. However, ROE calculations are influenced by years of stock repurchases, which reduce the reported equity base. Thus, a higher ROE does not necessarily mean a new investor will earn that percentage on their investment. Mastercard’s equity was about $5.6 billion with $92.2 billion in treasury stock, while Visa’s total equity stood at $35.2 billion, highlighting the impact of past repurchases on their comparisons.

Both firms continue to return capital to shareholders. In the June quarter, Mastercard repurchased $4.9 billion in shares, matching Visa’s repurchases. While these buybacks can increase earnings per share, their value depends on the price paid. The long-term question remains whether advancements like AI shopping will affect Visa’s network advantage. Investors should focus on earnings and cash flow per share rather than relying solely on ROE for comparisons.

Visa’s July results showed a 14% increase in net revenue to $11.63 billion, with adjusted earnings per share growing 11% to $3.32. Mastercard’s net revenue rose 14% to $9.3 billion, with GAAP earnings per share reaching $4.97. Both companies face pressures from client incentives and competition, which can impact their revenue and profitability. As of October 5, Visa traded at 25.6 times forward earnings, while Mastercard was at 26.6 times, with trailing price-to-free-cash-flow multiples of 32.3 and 29.6, respectively.