Being a growth investor doesn't have to be complicated. An investor just has to pick leading businesses in industries with promising growth trends and hold their stocks for the long term.
The payments industry is poised to keep thriving as more consumers shift away from cash and to other payment methods. The consulting company Boston Consulting Group forecasts that annual global payments industry revenue will reach $3.3 trillion by 2031.
Mastercard (MA 1.33%) is positioned to be a major winner from this trend toward alternate payment methods. But is the stock a buy for growth investors? Let's examine Mastercard's fundamentals and valuation to get an answer to this question.
Respectable top-line and bottom-line growth
Mastercard's $359 billion market capitalization positions it as the second-biggest player in the payments industry alongside Visa's (V 0.65%) $461 billion market cap. Just like Visa, Mastercard is a truly global business. The company helps to process millions of transactions for individuals and businesses in over 210 countries and territories around the world every day.
Mastercard recorded $5.8 billion in net revenue during the fourth quarter ended Dec. 31, which was up 11.5% over the year-ago period. While this growth rate wasn't as rapid as the 26.6% growth rate posted in the prior year's quarter, it is still impressive.
That's because after more than a year of COVID-19 travel restrictions, Mastercard faced a low bar to clear in the fourth quarter of 2021. Restrictions throughout the world were rolled back or dropped altogether, which helped the company's net revenue roar back with a vengeance. With most markets having resumed pre-COVID life in the last year and inflation ravaging most of the globe during that time, Mastercard faced a higher bar to clear in the fourth quarter of 2022.
Yet the secular shift to digital payments helped the company overcome these obstacles. Mastercard's gross dollar volume increased 8% year over year to $2.1 trillion on a local currency basis due to healthy consumer spending. This was because consumers were still eager to get out and travel, which drove cross-border volumes to soar 31% higher over the year-ago period. Topping it all off, switched transactions grew 8% year over year for the fourth quarter of 2022.
Mastercard's non-GAAP (adjusted) diluted earnings per share (EPS) surged 12.8% over the year-ago period to $2.65 during the fourth quarter. Increased operating expenses reduced the company's non-GAAP net margin by nearly 60 basis points to 43.8% in the quarter. But a 2.3% decrease in Mastercard's outstanding share count was able to more than offset the drop in profitability. This explains how the company's adjusted diluted EPS growth outpaced net revenue growth for the quarter.
Mastercard's adjusted diluted EPS growth should remain strong in the years to come. In fact, analysts are anticipating 20.3% annual adjusted diluted EPS growth through the next five years. Putting that into perspective, the credit services industry growth projection is just 14.3%.
Image source: Getty Images.
The dividend growth rate could remain high
Mastercard's 0.6% dividend yield isn't anything to brag about compared to the S&P 500 index's 1.7% yield. But then again, that is more of an apples-to-oranges comparison anyways since Mastercard's superior growth prospects make it more of a growth stock than an income stock.
The company's dividend payout ratio is poised to come in at just 18.7% in 2023 based on the current annualized dividend per share of $2.28. Because this non-burdensome payout ratio gives Mastercard the ability to prioritize future growth and debt repayment, outsized dividend growth like the most recent 16.3% dividend hike should continue moving forward.
World-class businesses don't come cheap
Mastercard has earned a reputation for being one of the most dominant companies on the planet in recent years. Given the company's enviable execution, the premium valuation comes as no surprise.
Mastercard's forward price-to-earnings (P/E) ratio of 25.6 is well above the credit services industry average forward P/E ratio of 17.5. But with robust growth potential, that valuation appears to be reasonable enough to make the stock a buy for growth investors with a five-plus year holding period.
