Lucrative long-term investing is as simple as picking dominant businesses in industries with significant growth catalysts.
Few industries hold as much long-term promise as payments processing. That's because the massive shift from cash to alternative payments shows no signs of slowing down. The industry forecast from Boston Consulting Group predicts the industry will blossom from $1.5 trillion in 2021 to $2.9 trillion by 2030.
Aside from Visa, nobody will benefit as much from this as Mastercard (MA 0.39%). Let's take a look at the latter's fundamentals and valuation and discuss three reasons why the stock is a no-brainer buy for growth investors.
1. Mastercard consistently outperforms
In late July, Mastercard shared its financial results for the second quarter ended June 30. And the company certainly didn't disappoint analysts with its net revenue and non-GAAP (adjusted) diluted earnings per share (EPS) during the quarter.
Mastercard reported $5.5 billion in net revenue in the second quarter, producing 21.4% year-over-year growth. That's even considering the negative impact of discontinuing operations in Russia in the first quarter of this year. This came in ahead of the average analyst forecast of $5.3 billion in net revenue. And it was the ninth quarter out of the last 10 quarters that the company has accomplished this feat. Strong all-around performance in Mastercard's three key areas was responsible for this double-digit net revenue growth rate in the second quarter.
Thanks to reopened borders, the company's cross-border volume soared 58% higher over the year-ago period on a neutral currency basis. Cross-border volume is when the issuing country of a credit or debit card is different from the merchant country where a transaction is completed.
Increased international travel helped Mastercard's gross dollar volume surge 14% higher year over year to $2.1 trillion during the quarter on a local currency basis, which doesn't account for foreign currency translation. Gross dollar volume is the dollar amount of transactions that are authorized on the company's payment network.
Finally, Mastercard's switched transactions were up nearly 12% over the year-ago period to 30.4 billion in the second quarter. Adjusting for the impact of withdrawing business operations from Russia, this would have been 22% higher for the quarter.
The company posted $2.56 in adjusted diluted EPS during the second quarter, which was a 31.3% year-over-year increase. This was well above the analyst consensus of $2.36 for the quarter. How did Mastercard top the average analyst-adjusted diluted EPS prediction for the ninth quarter out of the past 10 quarters?
The company's higher net revenue base and a 260-basis-point expansion in its adjusted net margin to 45.4% were the primary factors that led to this significant earnings growth. And a 2% reduction in Mastercard's diluted weighted-average outstanding share count was the other component of its robust growth in the second quarter.
2. Mastercard's dividend can rocket higher
Mastercard's 0.6% dividend yield is well below the 1.5% dividend yield of the S&P 500 index. However, the company's starting dividend yield is deceptively low.
That's because analysts are projecting that Mastercard will deliver 22.8% annual adjusted diluted EPS growth through the next five years. Along with a dividend payout ratio that will come in around 18.5% in 2022, this sets the table for huge dividend growth. That's why I believe the dividend will at least double over the next five years.
3. A reasonable valuation for a blue chip stock
Mastercard is a fundamentally wonderful business. That's why it would be unrealistic to expect to scoop up shares of the stock at a bargain-bin valuation.
Mastercard's forward price-to-earnings (P/E) ratio of 27.6 would be high for just about any other business. But for its 20%-plus annual earnings growth, the impressive wealth compounder is sensibly valued. For context, Visa's forward P/E ratio of 25.1 is only a bit lower than Mastercard's. Yet the latter's annual earnings growth is far higher than Visa's 18.2% annual earnings growth forecast for the next five years. That's what makes Mastercard such a great pick for growth investors.