The Dow Jones Industrial Average is a group of 30 of the best businesses on the planet. A $10,000 investment in the Dow Jones index in February 2013 would have compounded into more than $30,000 with dividends reinvested as of a few weeks ago.
There are, however, plenty of world-class businesses that aren't a part of the index that have done much better for investors: The payments processing company known as Mastercard (MA 1.33%) parlayed a $10,000 investment in February 2013 into more than $77,000 with dividends reinvested through early February of this year.
Of course, the caveat is that past performance is no guarantee of future results. However, Mastercard appears positioned to keep doing well. Let's assess the company's fundamentals and valuation to lay out why this may be the case.
Industry tailwinds could mean a bright future for Mastercard
An estimated 263 million American consumers do at least some shopping online. And this is forecast to more than 291 million by 2025. Because paying with traditional payment methods like cash or check isn't feasible while shopping online, the surge in e-commerce bodes well for debit and credit card usage.
That explains why the consulting firm Boston Consulting Group expects that global payments industry revenue will compound at a high-single-digit clip annually from 2021 to reach $3.3 trillion by 2031. Having processed $8.2 trillion of payment volume in its last four quarters, Mastercard will be one of the biggest beneficiaries of this vast shift toward e-commerce and alternative payment methods. For context, this trails the $14.1 trillion in payment volume that Visa (V 0.65%) processed in the last four quarters.
Because Mastercard is a formidable rival to Visa, the company should have no problem persuading more and more merchants to accept its payment network. That's because a well-recognized brand such as Mastercard could help merchants attract many more customers that they otherwise may not have picked up. This is why analysts believe that Mastercard's non-GAAP (adjusted) diluted earnings per share (EPS) will grow by 20.3% annually during the next five years. Putting this into perspective, that is well above the credit services industry average annual earnings growth outlook of 14.3%.
Explosive dividend growth lies ahead
Mastercard's 0.6% dividend yield is considerably lower than the average Dow Jones index yield of 2.6%. But this is only because the company's share price has increased nearly 600% in the past 10 years, while its dividend growth increased 850% over that period.
Given that Mastercard's dividend payout ratio will be just under 19% in 2023, healthy dividend growth should continue in the future. Such a modest payout ratio leaves the company with enough capital to make acquisitions and repay debt to strengthen the business.
The valuation is compelling for long-term investors
Mastercard is a fundamentally robust company. This is probably why shares of the stock have managed to gain 11% during the last year, while the Dow Jones declined about 2% during that time.
Mastercard's forward price-to-earnings (P/E) ratio of 25 may seem expensive stacked up against the credit services industry average forward P/E ratio of about 17. But the company is lower risk than most of its peers because it doesn't extend credit to customers, and Mastercard's earnings growth prospects are superior. The stock stands a good chance of generating mid- to high-teens annual total returns over the next several years, which makes it a buy for growth investors.
