It's no secret that the payment processing company Mastercard (MA 1.50%) has absolutely crushed the market over the past decade. In fact, Mastercard's 25% compound annual growth rate over the past 10 years easily outpaced the S&P 500's 14.5% annualized returns over that period.
But with Mastercard's stock down about 3% this year as the broader markets have surged higher, let's dig into the reasons why now is a great time for growth investors to buy this stock for their portfolio.
1. A trusted brand
Mastercard is the second-largest payment processing company in the world (trailing only Visa), with 2.5 billion branded cards in circulation.
Mastercard's strong reputation as a brand allowed it to remain firmly profitable in 2020, even as the COVID-19 pandemic produced one of the most difficult years in recent history. It's important to understand that Mastercard isn't directly involved with the consumers who use its cards. The company partners with financial institutions that issue the credit or debit cards to their customers, from which the financial institutions then can earn annual fees, late fees, and interest income. Mastercard's close partnerships with large banks such as Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo allowed its total cards in circulation to grow 7.5% year over year to 2.3 billion at the end of last year.
Mastercard's net revenue dropped 9% last year to $15.3 billion, resulting in a 17% decline in adjusted diluted earnings per share (EPS) to $6.43 during that period (this differs only slightly from EPS by generally accepted accounting principles, or GAAP -- the main difference was a $0.06-per-share adjustment related to attorney fees and litigation settlements with the U.K., which will have no impact on the company's current or future operations).
But while COVID was a short-term headwind for Mastercard, it may turn out to be a blessing in disguise. That's because, according to a recent survey, 56% of consumers have tried a new payment method during the pandemic. This accelerated interest in new, contactless payments should bode well for Mastercard in the near term and the long term as its total processed payment volumes and transactions march higher.
Coupled with the ongoing economic recovery as the world learns to live with COVID, this has analysts forecasting that Mastercard's net revenue will soar 23% to $18.8 billion this year. And as a result of much higher revenue, analysts expect that Mastercard's adjusted diluted EPS for this year will increase 29% over last year to $8.27.
Analysts expect that the continued shift to cashless payments and Mastercard's nearly unparalleled brand recognition will allow the company's adjusted diluted EPS to grow at a 26% rate annually over the next five years.
2. The balance sheet is nearly perfect
Mastercard doesn't just have a robust growth story going for it. The company also possesses a very healthy balance sheet as measured by its ratio of net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA).
As of the third quarter, Mastercard had $7.5 billion of net debt ($13.9 billion of total long-term debt less $6.4 billion in cash). Over the past four quarters, Mastercard has generated EBITDA of $10.8 billion for a net debt-to-EBITDA ratio of 0.7. This means that hypothetically, Mastercard could repay all of its debt in roughly eight months if it didn't have to pay income taxes and if it didn't pay a dividend.
Mastercard's minuscule net debt-to-EBITDA ratio suggests that its management team has been running the company conservatively, which puts its long-term risk of going bankrupt at nearly zero.
3. Mastercard offers growth at a rational price
Judging by its growth prospects and balance sheet, Mastercard is a high-quality growth stock that could deliver outsized returns going forward if investors pay a fair price. Let's look at the valuation to demonstrate why growth investors can still buy Mastercard hand over fist.
At Thursday morning's share price around $348, Mastercard is trading at a forward price-to-earnings ratio of 33. Given that the stock is poised to produce 26% annual earnings growth over the next five years, this comes out to a reasonable price-to-earnings growth ratio of just under 1.6.
And while Mastercard's 0.6% dividend yield will be only a minor part of the stock's returns for the foreseeable future, the well-covered dividend offers more than any high-yield savings accounts. This yield is just the cherry on top since the dividend is likely to grow well into the double-digits annually for the foreseeable future as Mastercard's profits and stock price steadily climb higher.