Mastercard: Paying up for growth

Mastercard is one of the largest positions in my portfolio so I’m using this market correction to add the stock to my scorecard. This write-up will be shorter than usual because I think the investment case for Mastercard is simple.

MasterCard is the world’s second largest payment network in the world (Visa is the world’s largest) and benefits from network effects and recurring income. Mastercard collects a small fee from connecting merchants, customers and banks with the company processing 150 currencies in more than 210 countries. The company’s costs are mostly fixed costs so increased transactions and revenue will lead to growing profit margins and free cash flow. Operating profit margins have grown from 27% in 2007 to 57% in 2019.

Mastercard is a major beneficiary from secular trends such as the rise of e-commerce and electronic payments. Around 80% of the world’s transactions are still settled in cash so MasterCard’s main competitor is cash or automated clearing houses and not Visa. As one of the largest payment networks in the world, the company benefits from a wide moat because of its huge installed merchant and user base.

USDm Revenue Net profit Operating cash flow Free cash flow Shares (diluted) DPS
2008 4,992 -254 413 243 1,301 0.07
2009 5,099 1,463 1,378 1,239 1,300 0.06
2010 5,539 1,846 1,697 1,546 1,310 0.06
2011 6,714 1,906 2,684 2,507 1,284 0.06
2012 7,391 2,759 2,948 2,730 1,258 0.12
2013 8,346 3,116 4,135 3,836 1,215 0.29
2014 9,473 3,617 3,407 3,073 1,169 0.49
2015 9,667 3,808 4,043 3,701 1,137 0.67
2016 10,776 4,059 4,484 4,102 1,101 0.79
2017 12,497 3,915 5,555 5,132 1,072 0.66
2018 14,950 5,859 6,223 5,719 1,047 1.00
2019 16,883 8,118 8,183 7,455 1,022 1.32

Mastercard’s growth has been very impressive. Net revenue and dividend per share have compounded at 11.2% and 30.6% respectively over the last 11 years. Mastercard has consistently maintained a net cash balance sheet until 2019 when it slipped into a net debt position but the company’s balance sheet and cash flow is very strong. The company’s payout ratio is around 15% so there’s plenty of room for the dividend to grow.

Mastercard recently warned that the virus outbreak would hurt cross-border transactions which would result in 9% revenue growth in the first quarter of 2020 (that’s a profit warning?!) so the share price has been under pressure. I think this is a short term issue and growth is likely to rebound once the virus outbreak is under control. Based on the recent USD290 share price, Mastercard is trading at 36.5x trailing earnings and a 0.5% dividend yield.

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