Warren Buffett is an all-time great investor who has led Berkshire Hathaway to become a powerhouse since taking over the company in 1965. With an investment portfolio worth $343.2 billion, Berkshire Hathaway is loaded with some of the best businesses in the world. One of those businesses is Mastercard (MA 0.05%), which Berkshire Hathaway has a 0.4% stake in that's valued at $1.4 billion.
But is stock in this financial services company a buy for your portfolio? Let's dig into Mastercard's fundamentals and valuation to answer this question.
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Mastercard is growing like a weed
Last month, Mastercard reported tremendous net revenue and non-GAAP (adjusted) diluted earnings per share (EPS) growth when it shared its results for the first quarter ended March 31.
The company recorded $5.2 billion in net revenue in the first quarter, which equates to a 24.4% growth rate over the year-ago period. This easily beat the $4.9 billion net quarterly revenue consensus estimate from analysts. How did Mastercard generate high enough revenue to surpass the average analyst estimate for the ninth quarter out of the past 10 quarters?
The company's net revenue growth was fueled by several factors.
First, Mastercard's gross dollar volume surged 17% higher year over year to $1.9 trillion in the first quarter. The economic reopening that continued throughout the world helped to more than offset the loss of revenue stemming from discontinuing operations in Russia following the country's invasion of Ukraine.
Next, Mastercard's cross-border volumes rocketed 53% higher in the first quarter compared to the year-ago period. That's because, as of March, cross-border travel was higher than 2019 levels for the first time since the beginning of the COVID-19 pandemic, according to CEO Michael Miebach.
Last (but not least), Mastercard's switched transactions -- the number of total transactions processed -- increased 22% year over year in the first quarter. This was also due to the global economic recovery.
Mastercard generated $2.76 in adjusted diluted EPS in the first quarter, which represents a 58.6% growth rate over the year-ago period. This comfortably exceeded the average analyst estimate for the quarter of $2.17 adjusted EPS, and it marked the ninth quarter out of the last 10 that the company has done so.
Besides Mastercard's higher net revenue base, this was the result of two factors. The company's non-GAAP net margin jumped 1,040 basis points year over year to 52.3% in the first quarter. And Mastercard's diluted weighted-average outstanding share count fell 1.7% over the year-ago period to 981 million in the first quarter.
Thanks to the encouraging industry outlook and Mastercard's size and scale, analysts anticipate 23.3% annual earnings growth through the next five years.
Plenty of dividend growth left in the tank
Mastercard has raised its dividend for 11 years straight. And that streak should continue for many more years because of the stock's high earnings growth potential and its sustainable dividend payout ratio.
Mastercard's dividend payout ratio is expected to be 18.6% in 2022. This lets the company retain the vast majority of its earnings to plow back into the business, as well as execute share buybacks to drive adjusted diluted EPS higher. This should lead to dividend growth at least in line with earnings growth for the foreseeable future.
Mastercard's 0.6% dividend yield won't be impressive to income investors. But for investors with time on their side, Mastercard's high growth prospects make up for the low starting yield.
A no-brainer buy
Mastercard is one of the highest-quality stocks in the world. And the valuation doesn't appear to be unreasonable at the current price.
Mastercard's forward price-to-earnings (P/E) ratio of 26 is significantly higher than the credit services industry average of 14.4. But since Mastercard doesn't provide credit to customers, the stock is largely shielded from economic downturns. This is why the premium to its industry is justified. And it also explains why analysts have given it a $432 12-month target price, which is a 31% upside from the current $330 share price. This makes Mastercard an attractive pick for growth investors.
