Rithm Capital Corp (RITM)

[Enterprising Investor]

Earlier today, I attempted to compare MSRs to credit and debit card fees charged to merchants.

There was a reason, but as is often the case with me, my point may have missed the mark. Think of NRZ owning a "toll bridge" when it comes to the MSR component of its business.

I do not normally like to embed my comments into the work of others, but today I asked myself for a little leeway. In addition, the analogy is not perfect. Since NRZ is a REIT, it cannot reinvest profits into its business. Most of the income must be paid out. The only way to get around this issue is by reinvesting the dividends. -EI

Buffett Says: Invest In "Toll Bridges" (10/27/09)

By Sham Gad

The now famous "toll bridge" reference to investing was made famous by Warren Buffett. This is not to say that you should literally invest in a toll bridge, but rather in the type of investment that works much like one. They make great growth investments when you can find them at the right price. As the name implies, if you are heading down a toll bridge or road, and you come to the toll stop, you must pay it. And if this bridge or road makes life easier for folks, well, you can expect them to pay the toll on a regular basis.

A Beautiful Concept

The toll bridge is a brilliant way to think about investing. Find a business that makes its money by charging a small sum to a high-volume consumer base on a regular basis and you just may have something intriguing. Such is the case with payment processor Heartland Payment Systems (NYSE:HPY), a payment processor that focuses on the merchant side of the payment processing business. It's common to put Heartland in the same bucket as Visa (NYSE:V) or MasterCard (NYSE:MA), but they are not direct competitors. Indeed, the drivers of growth - consumer card use, same store sales, new merchant acceptance - are similar for them all, but Visa and MC operate in a "four party system", in which they connect merchants, cardholders, issuing banks and acquiring banks.

The difference is, Visa and MasterCard operate payment networks rather than focusing on the actual processing. Heartland specifically focuses on the merchants - the businesses that you and I go to to buy goods and services.

One important piece of history: earlier this year, Heartland's processing network was breached and the shares took a nosedive. The company has done an excellent job of fixing the issue and the ultimate cost to Heartland - estimated to be around $100 million pretax - will not damage the company's franchise over the long-term. Recently, the company announced a deal with Hypercom Corporation (NYSE:HYC) to provide the company with high-security payment systems.

Heartland's focus on small businesses means it has a huge market, as the vast majority of businesses today are classified as small business. Over the past 10 years, the company has tripled its market share and now processes more than $70 billion worth of transactions. (For related reading, check out Inside National Payment Systems.)

https://www.investopedia.com/stock-analysis/2009/buffett-says-invest-in-toll-bridges-hpy-v-ma-hyc1027.aspx

Note: Global Payments, another payment processor, acquired Heartland on 4/25/16.