Visa Inc.

AMERICAN EXPRESS CO. $59 (New York symbol AXP, Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.1 billion; Market cap: $64.9 billion; Price-to-sales ratio: 2.0; Dividend yield: 1.4%; TSINetwork Rating: Average; www. americanexpress.com) gets most of its revenue from the fees it charges merchants who accept its American Express charge and credit cards. Unlike Visa (see page 13), Amex is also a lender. As a result, it earns interest on its cardholders’ outstanding balances, and writes off bad loans. In addition, the company operates a travel business.

On average, the company’s cardholders spent 5.6% more in 2012 than in 2011. However, demand for Amex’s travel services is falling because businesses are conducting more meetings online.

In response to the drop in corporate travel, the company is restructuring its travel division, including cutting the number of travel agents it employs and making it easier for clients to book trips and hotels online. These moves will cut its workforce by 9% and cost $287 million (after tax).
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VISA INC. $159 (New York symbol V; Conservative Growth Portfolio, Finance sector; Shares outstanding: 810.6 million; Market cap: $128.9 billion; Price-to-sales ratio: 12.4; Dividend yield: 0.8%; TSINetwork Rating: Above Average; www.visa.com) operates the world’s largest electronic payments network. The company processes credit, debit, prepaid and commercial payments under the Visa, Visa Electron, Interlink and PLUS brands.

Visa gets its revenue from fees it charges card issuers and merchants for using its network. These charges are based on payment volume, transactions processed and other factors.

Moreover, Visa is a financial intermediary, so it doesn’t lose money if cardholders fail to pay their bills. Instead, banks that issue Visa cards assume liability, set repayment terms and evaluate customer creditworthiness. That cuts Visa’s risk.
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As a result of the latest lawsuit settlement between card processors Visa and MasterCard and banks and retailers, merchants may now charge U.S. consumers more if they use credit cards at the cash register. This fee could be as high as 3% of the purchase price. But rather than charge this fee, retailers are more likely to offer discounts to consumers who pay with other methods, such as cash or debit cards. Either way, the outlook for Visa Inc., $127.66, symbol V on New York (Shares outstanding: 811.2 million; Market cap: $103.6 billion; www.corporate.visa.com), remains strong....

INTERNATIONAL BUSINESS MACHINES CORP., $192.45, New York symbol IBM, reported higher-than-expected earnings for the latest quarter. It also raised its earnings forecast for all of 2012. That’s why the stock rose 3% this week. In the three months ended June 30, 2012, the company earned $3.9 billion. That’s up 5.9% from $3.7 billion a year earlier. IBM spent $3.0 billion on share buybacks in the latest quarter. Due to fewer shares outstanding, earnings per share rose 11.3%, to $3.34 from $3.00. Without unusual items, mainly costs to integrate recently purchased companies, IBM’s earnings per share would have risen 13.6%, to $3.51 from $3.09. On this basis, the latest earnings beat the consensus estimate of $3.43 a share....

p>TORONTO-DOMINION BANK $83 (Toronto symbol TD; Conservative Growth Portfolio, Finance sector; Shares outstanding: 909.2 million; Market cap: $75.5 billion; Price-to-sales ratio: 2.7; Dividend yield: 3.5%; TSINetwork Rating: Above Average; www.td.com) is Canada’s second-largest bank, with total assets of $773.7 billion. In December 2011, TD completed its $6.8-billion purchase of MBNA’s Canadian credit card operations from Bank of America (New York symbol BAC). These assets are a great fit for TD: They added 1.8 million clients to its 4.0 million credit card accounts. As well, MBNA is the largest MasterCard issuer in Canada. That diversifies TD’s credit card business beyond its current Visa cards.

The MBNA division should add $0.05 a share to TD’s annual earnings in the first year, and $0.10 a share thereafter.

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Bank of Nova Scotia is our top pick among Canada’s five main banks, but the other four also have bright prospects. Most are using their strong balance sheets to make profitable acquisitions at bargain prices. That should let them keep raising their dividends. ROYAL BANK OF CANADA $56 (Toronto symbol RY; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.4 billion; Market cap: $78.4 billion; Price-to-sales ratio: 2.2; Dividend yield: 4.1%; TSINetwork Rating: Above Average; www.rbc.com) is Canada’s largest bank, with $815.0 billion of assets. The U.S. Commodity Futures Trading Commission (CFTC) recently accused Royal of using a complex series of trades to cut its tax bill in Canada. Specifically, the CFTC says that divisions of the bank bought Canadian and U.S. dividend-paying stocks (plus futures contracts on these stocks) and quickly sold them to other divisions. These transactions would let Royal earn tax credits on the dividends it received from these holdings....

PLEASE NOTE: Our next Hotline will go out on Friday, April 13, 2012. VISA INC., $121.01, New York symbol V, operates the world’s largest retail electronic payments network. The company processes credit, debit, prepaid and commercial payments under the Visa, Visa Electron, Interlink and PLUS brands. The company often uses third-party payment processors, provided they comply with Visa’s security standards and other requirements....

APPLE INC., $545.18, Nasdaq symbol AAPL, hit an all-time high of $548.21 this week, mainly due to speculation that the company will unveil the next version of its iPad tablet computer, the iPad 3, in the coming days. Apple has sold more than 55 million iPads since it first launched the device in 2010. Even though many of the company’s competitors now sell tablets, iPads still account for over 60% of this fast-growing market. Separately, Apple has recently agreed to let China Telecom sell its new iPhone 4S smartphone; China Telecom is China’s third-largest wireless carrier, with 15 million customers. Apple already sells the iPhone though China Unicom, China’s second-largest carrier. Apple also hopes to work out a deal with China Mobile after it upgrades its systems to handle the iPhone 4S. China Mobile is the country’s largest wireless provider, with 650 million subscribers....

ROYAL BANK OF CANADA $54 (www.rbc.com) has formed a new alliance with Shoppers Drug Mart, which operates over 1,200 drug stores in Canada. Under the deal, Shoppers’ customers can use a new Royal Bank Visa credit card to earn reward points on their purchases....

Visa has gained nearly 53% since we first recommended it at $76 in our December 2010 issue. And we think the company still has lots of growth ahead. That’s partly because Visa is in a strong position to profit from the global surge in e-commerce and cashless transactions. At the same time, its trusted brand will help it keep expanding in fast-growing markets like Asia and Latin America. Moreover, Visa is a financial intermediary, so it doesn’t lose money if cardholders fail to pay their bills. Instead, banks that issue Visa cards assume liability, set repayment terms and evaluate customer creditworthiness. That cuts Visa Inc.’s risk....