Mastercard (MA) is a technology company in the payments industry, offering payment solutions both for the development and also implementation of credit, debit, prepaid, commercial, and payment programs. It was founded in 1966 and its headquarters are located in Purchase, New York.
Mastercard delivered strong third-quarter 2021 financial results and announced some very positive news related to its dividend policy and shares buyback program.
I am neutral on MA stock, as it seems pricey now, and the robust revenue growth reported should continue after a decline over the past two consecutive fiscal years. (See Analysts’ Top Stocks on TipRanks)
Shares of Mastercard have losses of approximately 4.8% in 2021, having underperformed the U.S stock market.
Mastercard Business Highlights
Income investors rely on sustainable, safe, and increasing dividends of companies like Mastercard to fund payments, achieve retirement goals or build wealth over time.
In late November, Mastercard’s board of directors gave good news to the company’s shareholders. First, an announced dividend hike of 11%, raising the quarterly cash dividend from $0.44 per share to $0.49 per share, to be paid on February 9, 2022. Second, a new $8-billion share repurchase program, that will continue after the completion of previously announced $6-billion program.
It is worth noting that both dividend rate increases and share buybacks are very positive fundamental factors for stocks, reflecting the optimism regarding the company’s business outlook.
Mastercard is pursuing growth and market share in Mexico and Latin America, acquiring Arcus FI, which is a “platform that enables any business to launch and offer innovative payment solutions across LatAm.”
Mastercard has been very active in other acquisitions too, strengthening its business activities in cryptocurrency services and open banking. The acquisition of Aiia, “a leading European open banking technology provider that offers single and secure API access to banks and fintech companies, and enables users to easily perform account-to-account payments,” and the acquisition of CipherTrace, “a leading cryptocurrency intelligence company that offers digital asset security and fraud solutions for some of the world’s largest banks, exchanges and other financial institutions,” further show Mastercard’s adaptability.
Mastercard also announced its Mastercard Installments program, providing flexible digital payments and benefits for consumers, merchants, and lenders.
Consumers can make easy payments and purchases, lenders can use the proven and reliable Mastercard’s brand name to strengthen consumer spending, while merchants can focus on delivering more offerings to their customers and increase their revenues.
Q3 2021 Financial Results
Third-quarter 2021 financial results for Mastercard were very positive, reporting a net income of $2.4 billion, an increase of 59% compared to Q3 2020’s net income of $1.5 billion, and a 30% year-over-year increase of net revenue to $5 billion from $3.8 billion.
Diluted EPS rose 62% to $2.44 from $1.51 a year ago. Operating expenses increased 31% and operating income increased 29%. Third-quarter gross dollar volume was up 20% and purchase volume was up 23%. Cross-border volume was up 52% and switched transactions increased 25%.
Searching for a negative trend, the operating margin declined to 54.5% in Q3 2021 compared to a figure of 54.9% for Q3 2020.
MA Stock Concerns
Mastercard reported declining revenue growth in 2019, and 2020. In 2019, and 2020, the sales growth was 12.93% and -9.37%, respectively, when in 2018 it was 19.63%.
Another risk factor is the high debt-to-equity ratio of 2.07, according to Gurufocus. With a high-interest coverage ratio of 22.21 and very strong and positive free cash flows, the debt level is well kept under prudent management.
Data from Simply Wall Street shows that MA stock is overvalued based on its P/B Ratio (46.9x) compared to the U.S. IT industry average (4.6x). There is also a premium related to the P/E ratio, with a P/E Ratio of (39.4x) compared to the U.S. IT industry average (34x).
Wall Street Take
Mastercard has a Strong Buy consensus rating based on 11 Buy ratings. The average Mastercard price target of $441.09 implies 31.8% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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