Investors would be hard pressed to find higher-quality businesses than the 30 that belong to the Dow Jones Industrial Average. That is because these companies are known by most consumers and investors alike around the world for their iconic brands. This explains how a $10,000 investment in the Dow Jones index made 10 years ago would now be valued at $27,000 with dividends reinvested.
There are a handful of companies that are not included in the index that have created significantly more wealth for their shareholders in the last decade. Turning a $10,000 investment into $70,000 with dividends reinvested over that time, Mastercard (NYSE: MA) is one such company. Let’s examine the payment processor’s fundamentals and valuation to determine whether such outperformance could continue.
Growth catalysts could lead to promising prospects
The rise of e-commerce has coincided with the growth of alternative payments like credit and debit cards. Considering that these are the two most common payment methods that consumers use to participate in e-commerce shopping, this shouldn’t be a surprise.
Due to these trends, Mastercard has seen the number of its cards surge from nearly 1.2 billion to end 2012 to 2.7 billion at the end of 2022. The growing number of cards also led consumers to spend more of their purchasing power on the company’s payment network. This prompted more merchants to accept Mastercard as a payment method, fueling gross dollar volume growth (i.e., the total dollar amount of transactions completed) of 124% from 2012 to $8.2 trillion in 2022. That explains how the company’s net revenue tripled from $7.4 billion in 2012 to $22.2 billion in 2022.
In the years ahead, Mastercard’s growth should be just as promising. For one, Boston Consulting Group anticipates that the global payments industry could grow by an upper-single-digit rate each year to surpass $3.3 trillion in 2031. This is based on the expectation that as an increasing share of retail transitions to e-commerce, more consumers will pay with debit and credit cards. And because Mastercard is an industry leader with nearly unparalleled name recognition, there is reason to believe that it can grow faster than its industry.
That is why analysts believe that the company’s non-GAAP (adjusted) diluted earnings per share (EPS) will compound by 20.3% annually over the next five years. For comparison, that is much greater than the credit services industry average growth forecast of 15%.
Outsized dividend growth potential
Mastercard’s 0.6% dividend yield is a fraction of the Dow Jones’ average 2.1% dividend yield. But it’s important to keep in mind that the reason why the company’s dividend yield is so small is that its share price is growing almost as fast as its dividend. In other words, for a more modest dividend yield, shareholders are quickly growing their wealth.
With Mastercard’s dividend payout ratio set to come in at less than 19% in 2023, the company should have no issue handing out double-digit dividend increases year after year for the foreseeable future. This also compensates for the lower starting income in my opinion.
A clear buy for growth investors
Up nearly 8%, shares of Mastercard have performed decently thus far in 2023. This has pushed the stock’s forward price-to-earnings ratio up to 25.3. While this is way above the credit services industry average of 16.9, it is arguably a justified valuation premium. This is because Mastercard’s growth profile is superior to that of its industry, which is what makes it a convincing buy for growth investors.
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Kody Kester has positions in Mastercard. The Motley Fool has positions in and recommends Mastercard. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.