Why War­ren Buf­fett wants to own the credit card space

Financial Mirror (Cyprus) - - FRONT PAGE - By Jon C. Ogg

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., 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 was the same stake at more than 151 mln 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 AmEx 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. and MasterCard Inc. 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 mln 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 bln, 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.

The lat­est 13F fil­ing from Berk­shire Hathaway showed that the stake in Visa was a larger one yet again, at 2.51 mln shares as of De­cem­ber 31, 2014. This was up from 2,146,290 in the pre­vi­ous quar­ter, and it has grown from 1.56 mln shares last March. MasterCard as a larger stake as well. That was 5.39 mln 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. or even Dis­cover Fi­nan­cial Ser­vices. 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 mln and the stake in MasterCard is worth close to $500 mln. That is more than $1.1 bln, but still a frac­tion of the $12 bln 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.

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