Should credit card companies be sin stocks?
A sin stock is a term which refers to stocks which operate in businesses which are considered to be immoral or unethical. Sin stocks typically include companies in the alcohol, tobacco, weapons, gambling and sex industries. Maddeningly for the socially responsible investing set, studies show that sin stocks tend to outperform its counterparts of a similar size. Sin stocks also tend to be recession proof stocks.
In an age where governments, institutions and individuals cannot seem to control their spending, is it time to classify credit card companies as a sin stock? Incurring debt obviously does not have the same unethical or immoral connotation as gambling, smoking or arms dealing. However, charging close to 20% interest on credit card debt is not exactly a moral business practice either. Many argue that the ease to which credit card companies are giving cards to people- especially the young or economical vulnerable- is part of the reason why we, as a society, cannot seem to control our spending.
The ethics of whether being a credit card issuer is sinful or not is a subjective one. However, from a financial perspective, credit card companies do seem to share at least two traits with sin stocks.
Firstly, they seemed to be engaged in wide ranging litigation and regulatory action. MasterCard Incorporated reported in its last financial report that it had to set aside $770 million pre tax charge related to allegations that MasterCard is charging too high an intercharge fee; none of the allegations have been proven.
Secondly, publicly traded credit card companies perform well in bad economic times. For example, both Visa Inc. and MasterCard Incorporated reported double digit revenue and net operating revenue growth in the last quarter. Both Visa and MasterCard have also raised dividends recently and have a history of frequent dividend increases. In other words, if you can stomach investing in people becoming more indebted, credit card companies may not be a bad investment.