and his new Berkshire Hathaway (
) investment manager Todd Combs have in common a proclivity for
credit card stocks, though their purchases were made under
different circumstances and of different companies. Combs'
choices, Visa (
) and MasterCard (
), also had dramatic run ups in market value that contributed to
the greater than 26% return Buffett lauded Berkshire's two new
managers for in his
2012 annual letter
See more about how they did it here
Buffett and American Express (
American Express is one of what Buffett called Berkshire's "Big
Four" stock holdings in his
. It is also old, dating back to 1991, at $300 million initially.
But Buffett's original investment reads like a prototype of more
recent Bank of America (
) and Goldman Sachs (
) capital infusions to ease distress. In 1991, American Express
was suffering from the results of a failed attempt to expand into
a full-fledged financial services conglomerate and needed cash.
Buffett gave it to them in exchange for preferred stock with an
8.5% dividend and the right to convert it to common stock at $33
to $37 per share. The CEO at the time called Buffett's move a
"vote of confidence" in the company.
The stock was automatically exchanged for 14 million common
shares when it did not reach the specified price range by August
1994. By that time though, the investment had grown to $385
million, along with three additional $26.5 million annual
interest payments, providing Buffett with a 64 percent return,
according to a 1995 New York Times article.
In the following year Buffett bought more common stock,
controlling 9.8% of the company's outstanding shares by 1995. As
of the fourth quarter of 2012, Berkshire holds 151,610,700 shares
of American Express in total, or 13.72% of the company, making it
the largest institutional equity owner of the company.
Buffett's first dealing with the company dates back even further.
The new Buffett biography, "Tap Dancing to Work: Warren Buffett
on Practically Everything," unearths this anecdote from a 1995
article in Fortune:
"Warren Buffett loves to tell a parable about the stock
market's irrationality. It was 1963, and a scandal involving fake
inventories of salad oil at a small subsidiary of American
Express drove down the price of Amex shares. How bad a problem
was this? To find out, Buffett spent an evening with the cashier
at Ross's Steak House in Omaha seeing if people would stop using
their green cards. The scandal didn't seem to give any of the
diners indigestion, so Buffett seized the opportunity to buy 5%
of the company for $13 million. He later sold his holding for a
$20 million profit."
The two instances suggest that Buffett believes in the power of
American Express' business to charge through short-term setbacks.
He didn't, however, buy any new shares when the company's stock
plunged to 10-year lows during the financial crisis of 2008 and
More recently, the more exclusive credit card has been increasing
in popularity. It experienced more purchase volume in 2011 than
MasterCard for the first time since MasterCard was known as
MasterCharge in the 1960, according to The Nilson Report. In a
year in which all four major card brands had purchase volume
increases, American Express' increased 13.4%, versus 6.1% for
American Express' share of U.S. purchase volume also increased to
26.3% in 2011, its third consecutive year of increases and up
from 19.9% in 1999.
As a result of the company's recovered capital strength from
2009, the Federal Reserve allowed the company in March 2012 to
instate a capital distribution plan, which included an 11%
increase to its dividend rate, from 18 cents to 20 cents per
quarter, and repurchasing up to $4 billion of its shares in 2012
and an additional $1 billion worth of shares during the first
quarter of 2013. The shareholder-friendly buybacks are part of
what prompted Buffett to say in his annual letter that his
ownership interest in American Express is "likely to increase in
Todd Combs and Visa (
) and MasterCard (
MasterCard was the second-largest holding at Todd Combs' Castle
Point Capital Management LLC before he joined Berkshire in
October 2010. It appeared in Berkshire's portfolio shortly
thereafter, at 216,000 shares in the first quarter of 2011, to
which it added 189,000 shares the next quarter, for a total of
405,000 shares. Since the purchases, MasterCard's market price
has approximately doubled. Shares are $528.87 per share on
Since Ted Weschler joined Berkshire in early 2012, and Visa
appeared in Berkshire's portfolio in the third quarter of 2011,
Todd Combs likely purchased this company as well. He started with
2,291,708 shares for $87 per share on average, and increased the
holding to 2,865,009 shares the next quarter for $94 per share on
In the second and third quarter of 2012 he reduced the stake to
1,555,459 shares for $119 and $129 per share on average. The
market price for Visa shares is $160.29 on Tuesday afternoon.
Visa and MasterCard are market leaders, dominating the top two
market share percentages in the U.S. credit card market and have
the two largest payment networks.
Both are also benefiting from significant headwinds at this time.
Global credit card transactions rose 12.1% in 2011 over the
previous year, to $135.33 billion. The number of credit, debt and
prepaid cards being used also increased 12.4% to 6.54 billion,
with Visa and MasterCard seeing the second and third-largest
increases, up 3.9% and 8.9%, respectively.
The credit card industry from 2011 to 2016 is expected to
increase to 238.99 billion purchase transactions, an increase of
89.31 billion from the 149.68 billion purchase transactions in
2011. Growth in the U.S. is estimated to e 44%, with the largest
growth coming from emerging markets, such as 105% in
Asia/Pacific, 99% in the Middle East/Africa, and 97% in Latin
America, according to The Nilson Report.
The benefits are reflected in Visa's fiscal first quarter 2013
results reported Feb. 6, Visa announced revenue of $2.85 billion,
compared to $2.55 billion the previous year, and net income of
$1.29 billion, a 26% increase over $1.03 billion the previous
year. It expects net revenue growth in the low double digits for
fiscal 2013. Visa also reported 9% year-over-year payments volume
growth and accelerated international expansion. The company has a
$1.5 billion share repurchase program it announced in the fiscal
fourth quarter of 2012, along with a 50% quarterly dividend
Similar, MasterCard on Jan. 31 announced a 10% fourth quarter net
revenue increase to $1.9 billion, and an 18% net income increase
to $605 million. The results excluded a U.S. merchant litigations
charge that hit in the fourth quarter of 2011. Its processed
transactions also increased 20% to 9.2 billion, and gross dollar
volume was up 14% on a local currency basis.
For the full-year 2012, MasterCard repurchased 4.1 million shares
for about $1.7 billion, and had $440 million remaining under its
In spite of the steady growth, about 85% of transactions around
the world still involve cash, leaving vast room for market
expansion for all three of the companies.
Read more about Todd Combs' and Warren Buffett's investments at
Berkshire Hathaway at their portfolio here. Also check out their
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