Most stocks appeal to a certain type of investor. A high-yielding name is likely to attract income-orientated investors, while those businesses that are growing at a high rate are often appealing to growth investors.
In the case of Mastercard Inc. (MA, Financial), it might appear the stock is best suited for those looking for high growth rates. Digging deeper, especially after a 20% fall from the 52-week high, reveals that investors of all stripes, including value and dividend growth investors, might be inclined to pick up shares of the payment processor company. Mastercard could be a stock that has broad appeal to many different types of investors.
Company background and results history
Mastercard reported first-quarter earnings results on April 28. The company outperformed Wall Street analysts’ expectations for both revenue and earnings per share. Revenue grew more than 24% to $5.17 billion, beating estimates by $268 million. Adjusted earnings per share of $2.76 compared favorably to $1.74 in the prior year and was 60 cents above projections.
Gross dollar volume improved 17% to $1.9 trillion. Cross-border volume was higher by 53% as travel patterns are beginning to normalize since the worst of the Covid-19 pandemic. Leadership noted that March marked the first month that cross-border travel was above 2019 levels since the pandemic began.
According to Yahoo Finance, analysts expect Mastercard to earn $10.55 per share in 2022, which would be a 20.4% increase from the prior year.
Mastercard has performed at a high rate since its initial public offering in 2006. Over the last decade, the company’s earnings per share have a compound annual growth rate of 16.1%. High growth rates often become harder to sustain as a company grows, but Mastercard has enjoyed an earnings per share CAGR of 16.4% since 2017. The company’s bottom line has actually accelerated slightly in the medium term, a sign of strength given how well Mastercard has acted since its IPO.
This is due to the ongoing transition from cash to electronic payments. The advancements in e-commerce have helped facilitate this development, but more and more people are completing financial transactions with credit and debit cards then with cash. There are Statista surveys showing that cash is becoming less of a method of payment as credit and debit cards accounted for roughly two-thirds of all financial transactions in the U.S. last year.
Electronic payments are likely here to stay, which puts the industry in general, and Mastercard in particular, in an advantageous position. Mastercard is accepted nearly everywhere credit cards are and the company processes transactions in more than 150 currencies around the world. Few, if any, peers can hope to duplicate the company’s ecosystem.
Ranking versus peers
Mastercard’s long-term performance has been impressive, but how does the company and its business compare to the rest of its industry in different areas?
In the area of financial strength, the company does have many red bars in its history section showing the current metrics are at the low end of what Mastercard has traditionally produced. That said, the company beats most of its peer group on most metrics. For example, debt-to-Ebitda outpaces more than three-quarters of the competition while interest coverage bests 62% of peers.
Mastercard shows a strong Piotroski F-Score and Altman Z-Score, with both scores near the top end of the scale.
The company gets a lot of bang for its investment buck as return on invested capital of 40.2% is well ahead of its weighted average costs of capital of 8.8%.
It is on profitability that Mastercard really begins to leave the competition behind.
On nearly every metric, Mastercard easily outdistances the vast majority of its peers. This includes return on equity, which is ahead of more than 99% of the competition, return on assets, which tops more than 98% of the industry, and operating margin, which is better than 85% of peers. All three scores are also at the high end of the company’s 10-year range.
The company still outshines the peer group even where Mastercard is weak relative to its own history. This includes metrics such as return on invested capital and return on capital. Here, Mastercard tops 98% and 95% of the competition.
With scores such as these on profitability, it should not be surprising that Mastercard has had 10 years of profitability.
Thanks to high growth rates, it is likely the company will continue to be profitable.
The yellow bars show Mastercard’s scores are middling against the company’s own history. The green bars show, once again, that the company remains ahead of most of its competitors.
The three-year earnings per share without nonrecurring item growth rate is near the low end of the company’s long-term range, but tops 64% of the industry. Important for dividend growth investors, the three-year free cash flow growth rate is close to the middle of Mastercard’s 10-year range, but above two-thirds of the industry.
Looking forward, future earnings per share and revenue projections outrank 75% and 70% of the industry group.
Considering financial strength, profitability, and growth, Mastercard is almost in a class by itself. The strength in fundamentals is a major factor in the company receiving a nearly perfect GF Score of 99 out of 100.
The electronic payments space is not going anywhere and Mastercard looks well positioned to take advantage of the ongoing transition from cash to electronic payments.
Dividend safety analysis
Shares of Mastercard yield just 0.6%, almost a third of the average yield of the S&P 500. While the dividend yield is low, it is the dividend growth that should excite investors. Following an 11.4% increase for the Feb. 9 payment, the company has raised its dividend for 11 consecutive years. The dividend has a five- and 10-year CAGR of 18.9% and 34.8%.
Dividend growth is slowing, but investors should continue to see double-digit increases based on the low payout ratios.
Mastercard distributed $1.76 of dividends per share last year while earning $8.40 per share for a payout ratio of 21%. For 2022, shareholders should see $1.96 of dividends per share, resulting in a projected payout ratio of 19% using analysts’ estimates. These ratios are just above the average payout ratio of 17% since 2012, but likely nowhere near a dangerous level.
Let’s consider the free cash flow payout ratio. Mastercard has paid out $1.8 billion of dividends over the last year while generating free cash flow of $8.8 billion for a payout ratio of 20%. This matches the average free cash flow payout ratio since 2018.
Could the company’s debt obligations hinder future dividend payments?
Mastercard’s interest expense totaled $434 million last year. Total debt stood at $14.6 billion as of the most recent quarter, resulting in a weighted average interest rate of 3%.
The table below shows where Mastercard’s weighted average interest rate would need to reach before free cash flow no longer covered dividend payments.
Source: Author’s calculations.
Mastercard’s weighted average interest rate would need to surge past 51% before free cash flow no longer sufficiently covered dividend payments. Therefore, debt does not appear to be a factor in the company’s ability to continue to pay its dividend.
Valuation analysis
Despite solid results and a strong overall business, Mastercard has struggled along with the rest of the market this year.
Year to date, the stock is down more than 20%. Shares are off nearly 21% from their 52-week high of $399.93 as well.
The plus side of this decline is the stock still represents a fast-growing company, but now at a lower valuation. Mastercard is trading at under 30 times expected earnings per share for the year. For context, the stock has an average price-earnings ratio of 30.3 since 2012 and 36.2 since 2017, according to Value Line.
On a historical basis, shares are fairly valued, but trading below the medium-term multiple.
The GF Value chart, which uses a number of metrics to determine fair value, shows that Mastercard is undervalued.
With a share price of $316.15 and a GF Value of $410.58, Mastercard has a price-to-GF Value ratio of 0.77. Reaching the GF Value could mean a 29.9% potential return in the share price.
Final thoughts
Following a plunge into bear market territory, Mastercard is now trading at a significant discount to its intrinsic value. At the same time, the business is expected to continue to grow at a high rate going forward. Even dividend growth investors should be attracted to the company’s ability to grow its dividend at a double-digit clip.
In short, Mastercard’s industry dominance, performance versus peers, the stock’s discount to its intrinsic value and dividend growth history gives growth, value and dividend growth investors alike a very compelling reason to consider owning shares of the company.
