When You Open Your Wallet, This Company Prospers

It's the most important part of the economy...

It makes up the largest percentage of economic activity – accounting for about 70% of gross domestic product.

We're talking about consumer spending.

This is why there was such a big focus on getting the stimulus checks out... By putting money in folks' pockets, the government was incentivizing spending and thus boosting economic activity.

Now that nearly half the U.S. population is vaccinated, people are beginning to get out more. That means they're rushing to spend money on the things that they didn't have a chance to do over the past 15 months.

And a lot of this spending is being done with credit and debit cards... According to small business lender Fundera, 80% of consumers now favor paying with a card over cash. Part of this is because of the COVID-19 pandemic, where consumers became wary of cash's germ-carrying capabilities.

In fact, an executive from today's company recently predicted a doubling – or even tripling – of digital payments on certain types of transactions like groceries.

Today's company thrives as people embrace this trend...

We last covered credit- and debit-card giant Visa (NYSE: V) in June 2020. At the time, consumer spending was just beginning to rebound from the depths of the pandemic.

Visa's electronic-payments network is the largest in the world by payment volume and in terms of the number of merchants that accept its cards. At the end of 2020, there were more than 1.1 billion Visa cards in circulation across the world. About 343 million of these were in the U.S., according to data from Statista.

It has a simple business model. The company makes most of its money from "card association fees." Essentially, Visa collects a small piece of the transaction – about 0.2% – every time someone pays with a Visa card.

Since Visa's network is so expansive, these fees add up quickly. Total payments volume on the Visa network of credit and debit cards was $8.9 trillion in the calendar year 2019... almost twice that of Mastercard (MA). And Visa holds about a 60% share of the credit and debit card market.

(We're using 2019's data because that was the last "normal" year for consumer spending.)

People are also using their Visa accounts more and more for online orders and smartphone payments...

At an investment conference earlier this month, the head of Visa Canada said the company saw such digital transactions double, or even triple, on some items. And even though a physical card wasn't used, Visa still collects the fee.

Furthermore, data continue to demonstrate the strength of the consumer...

Visa's Spending Momentum Index ("SMI") for May – which measures consumer spending in the economy – came in at a "historically elevated" reading of 123.3 last month.

The SMI also showed that 52% of consumers were spending more in May 2021 than they did in May 2019. Remember, we like looking at 2019 for comparisons, given the huge impact the COVID-19 pandemic played on consumer spending in May 2020.

Visa Chief Economist Wayne Best said May's SMI reading shows the "solid ongoing recovery" in consumer spending.

This is the second piece of positive data from Visa this month. In an SEC filing this month, Visa gave an update on consumer spending for April and May. It was up 59% year over year in April and 38% in May.

And when indexed to 100 for 2019, spending is up significantly. Visa's spending index read 131 in April and 132 in May. This indicates that consumer spending was up more than 30% each month from 2019 levels.

That's a good sign for the American consumer, which should boost the overall economy. Remember, consumer spending is the largest part of the U.S. economy. A rebound in consumer spending is a good sign for Visa...

Because it collects a small fee on each transaction that its cards are used for, a rebound in consumer spending means more fee revenue for Visa. And given that it has a capital-efficient business model, that will also translate into higher earnings and free cash flow for the company.

Sometimes investing is simple.