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Mastercard: Charging Ahead
09/19/2014 6:00 am EST
In the last four decades, people and businesses worldwide have transformed how they pay for goods and services; the rise of electronic payments has fueled economic growth while delivering value to consumers and merchants, observes Ingrid Hendershot, money manager and editor of Hendershot Investments.
With a unique and proprietary global payments network, MasterCard (MA) connects close to two billion cardholders with tens of millions of merchants around the world.
From its earliest days of credit cards (the company was found in 1906) to the contactless and wireless payment options of today, MasterCard has led the industry with its innovative and growing range of products and solutions.
With 85% of the world's transactions still made with cash and checks, there is significant opportunity for further long-term growth for MasterCard as billions of people migrate away from cash to a more efficient and secure global payment network as the digital and physical worlds converge.
MasterCard generates revenues based on the volume of activity on cards that carry their brands and the number of transactions they process for customers, as well as other payment-related services. Over the past five years, the firm has generated strong double-digit growth with sales compounding at a 13% annual rate and EPS at a 23% annual rate.
During the first half of 2014, double digit growth continued with revenues rising 14% to $4.6 billion and EPS charging 16% higher to $1.53.
MasterCard's business model is highly profitable with net profit margins expanding from an excellent 29% in 2009 to a superb 37% in 2013. This has translated into high returns on shareholders' equity, which have averaged an outstanding 38% over the same period.
With profitable operations and minimal capital expenditure needs, MasterCard generates strong free cash flows. Over the last decade, free cash flow has grown from $266 million to $3.5 billion on a trailing 12-months basis.
While the company currently pays a modest dividend, the dividend has been increased significantly in the last four years from $0.06 per share to a current $0.44 per share. Given the low dividend payout ratio, MasterCard has plenty of room to increase the dividend further in the years ahead.
MasterCard has also been using its strong cash flows to repurchase significant amounts of its stock including more than $5 billion of stock in the last three years.
Long-term investors should go shopping with MasterCard, a high quality company with a strong, global brand, double-digit growth, highly profitable operations, and strong cash flows.
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