The Dow Jones Industrial Average has done fairly well at enriching investors in the past 10 years. A $10,000 investment (with dividends reinvested) in the index in November 2012 would have blossomed into more than $33,500 in 10 years.
But for investors seeking even better returns, other options have delivered superior results. Having parlayed a $10,000 investment to over $77,500 in the same 10-year period, payments processor Mastercard (MA -0.08%) has crushed the Dow Jones. More importantly for investors, outperformance from the stock is poised to continue. Here's why.
A tremendous runway for long-term growth
Over the last four quarters, Mastercard has processed $8.2 trillion in transactions. This makes the company the second-largest payments processor in the world, behind the $16.3 trillion in transactions that Visa (V 0.05%) has completed in the same period.
As more consumers around the world choose to shop online, the transactions and dollar volumes handled by payments processors will only grow. Boston Consulting Group anticipates that the shift toward card and digital transactions will lead global payments industry revenue to almost double from $1.5 trillion in 2021 to $2.9 trillion by 2030.
With nearly unrivaled penetration and name recognition, Mastercard will be as big a beneficiary as Visa from the ongoing transition from cash to cashless payments. As alternative payment adoption increases, Mastercard has the resources to further build out its payment infrastructure in developing economies. This is why analysts project that Mastercard will deliver 20.9% annual earnings growth for the next five years.
And like Visa, Mastercard doesn't lend money to cardholders; it solely focuses on the completion of payments via its network. This makes it much easier for the company to rebound from recessions, a characteristic that makes Mastercard a steady performer.
Image source: Getty Images.
Forging a path to Dividend Aristocracy
Mastercard has handed out dividend hikes to its shareholders for 11 consecutive years. This is nearly halfway to the 25-year dividend growth streak required for a company to be a Dividend Aristocrat.
And with the dividend payout ratio expected to come in under 19% for 2022, Mastercard has the flexibility to reach that status in 2036. Such a low payout ratio allows the company to retain the funds necessary to execute on future growth opportunities through bolt-on acquisitions and share repurchases. This is why I am confident that the payout ratio will eventually expand and dividend growth will somewhat exceed earnings growth in the long run. That more than compensates for the fact that the stock's 0.6% dividend yield is far less than the 1.6% dividend yield of the S&P 500 index.
Growth at a reasonable price
Mastercard is a quickly growing business. This should be enough on its own to generate solidly double-digit annual total returns in the years ahead. And yet the stock's valuation also looks attractive.
Mastercard's trailing-12-month (TTM) dividend yield of 0.6% is moderately better than its 10-year median TTM dividend yield of 0.5%. Given that the company's fundamentals are arguably the best they have been in the past 10 years, this is a compelling valuation. And if that weren't enough to prove the valuation is a deal, the stock's forward price-to-earnings (P/E) ratio is just 27.5. That's a sensible price to pay for a company with 20%-plus annual earnings growth potential, which is what makes Mastercard a great buy for growth investors.
