One of the most popular stock market indexes out there is the Dow Jones Industrial Average. It contains some of the most widely recognized businesses in the world, such as Nike, Coca-Cola, and Walmart, and has produced a total return of 50% and 182% over the past five- and 10-year periods. This is no doubt a safe place to park your capital in the world of public equities.
However, if you're one who likes to pick individual companies to put money into, the objective is likely that you are trying to beat a specific index. In other words, if your primary goal is to beat the Dow Jones, it would be wise to consider buying Mastercard (MA 0.30%), a top blue chip stock.
Here's why.
A wonderful business model
With a combined payments volume of $5.1 trillion in their latest fiscal quarters, Mastercard, along with its direct competitor, Visa (V 0.95%), run a duopoly in the card payments industry. These two businesses essentially connect the banks serving merchants with those of their customers, charging fees on the transactions that run across their payments rails.
As more Mastercard-branded cards are issued, more merchants are inclined to accept them as payment methods. And because of this two-sided ecosystem, Mastercard benefits from network effects, a powerful advantage that makes it almost impossible for any business to penetrate the company's competitive positioning.
Mastercard operates with a capital-light business model. It costs almost nothing to process an incremental transaction because the underlying platform and infrastructure is already largely in place. And Mastercard's bank partners, such as US Bancorp and Wells Fargo, for example, take on the credit risk of borrowers potentially defaulting on their credit card balances.
An added benefit that is particularly important right now is that Mastercard has some resistance to higher inflation. If consumers are forced to spend more on anything in their daily lives, such as food or gas, the fees Mastercard makes rise as well. That's an attractive quality in today's economic environment.
Stellar track record
Mastercard's historical fundamental performance is nothing short of spectacular. In the past 10 years, net revenue has compounded at an annual rate of 11.6%. This was undoubtedly bolstered by the fact that the business's gross dollar volume (GDV) has increased rapidly, from $3.6 trillion in 2012 to $8.2 trillion last year. And Mastercard's operations are diverse, with 67% of its Q4 GDV derived in markets outside the U.S.
To see sales rise at a double-digit clip is one thing. Being able to have it flow to the bottom line is another. When it comes to profitability, it's hard to find a company better than Mastercard. The company's exceptional operating margin and net profit margin of 56.8% and 44.7%, respectively, in 2022 have been expanding over the last several years.
And because capital expenditures required to reinvest in the business are extremely low, free cash flow (FCF) is through the roof. Over the past three years, Mastercard has generated a monster $25.3 billion in FCF on cumulative revenue of $56.4 billion.
Taking care of shareholders
A wonderful business model and a stellar track record have combined to produce outstanding returns for shareholders. Mastercard's stock has soared 582% over the past decade, crushing the broader S&P 500, Nasdaq Composite Index, and the Dow Jones. This is the perfect example of how strong fundamental performance translates to outsized investor gains.
As I mentioned, Mastercard prints cash. And this favorable situation has allowed the company to employ a shareholder-friendly capital allocation policy. In fact, Mastercard paid out 95% of its operating cash flow in the form of dividends and share repurchases in 2022.
Mastercard has paid a steadily increasing dividend ever since it became a publicly traded business in 2006, with a current yield of 0.62%. And over the past 10 years, from the start of 2013 through the end of 2022, the company's diluted share count has shrunk by 23%. This helps to boost earnings per share, and it increases the ownership stake of existing stockholders without the need for them to spend a cent.
This kind of performance is something investors should prioritize in the stocks they buy, and it makes Mastercard a worthy candidate for anyone's portfolio.
