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Payment Processors Add Leverage for Organic, Inorganic Expansions

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Increased leverage

Payment processors (XLK) have increased their leverages for the purpose of organic and inorganic expansions. Leverages also increased on share repurchases as prices fell in 2H15 and 1H16.

Visa (V) took on debt of $16 billion to partially fund its acquisition of Visa Europe. The company has a debt-to-equity ratio of 54%, higher than the industry average of 40%. The notes were issued at fixed rates of interest ranging from 1.2% to 4.8%, with maturities of between two and 30 years.

Visa had cash and cash equivalents and available-for-sale investment securities worth $20 billion as of March 31, 2016. The company expects significant startup costs for setting up domestic operations in China.

MasterCard (MA) has debt of $3.3 billion with a total balance sheet of $15.9 billion as of March 31, 2016. This compares to $16.2 billion in 4Q15.

In 1Q16, the company generated free cash flow from operations of $1.0 billion compared to $0.9 billion in the prior year’s quarter. The company had total cash and cash equivalents and liquid investments of ~$4.9 billion as of March 31.

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American Express on reduction

American Express (AXP) generated a return on equity of 23.6% in 1Q16 compared to 29.0% in 1Q15. The company’s risk-based capital ratios were comfortable. It had a Tier 1 ratio of 13.2% and a Tier 1 ratio divided by risk-weighted assets of 12.0%.

The company’s total assets increased by $4 billion to $159 billion in 1Q16 compared to 1Q15. However, its long-term debt fell to $47 billion compared to $55 billion in the same period.

Discover Financial Services’ (DFS) borrowings stood at $25 billion compared to $22.7 billion in the prior year’s quarter. The company has a high net debt-to-equity ratio of 1x.

In the next part of this series, we’ll see how payment processors are rewarding their shareholders.

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