Mastercard Is a Blue Chip Stock Everyone Knows, but Is It a Buy?

By now, it's not a secret that economic growth is expected to grind to a halt with high interest rates inhibiting economic activity. This helps to explain why the S&P 500 index remains approximately 14% off its all-time high of nearly 4,800.

But since the index is comprised of 500 different stocks, it shouldn't be surprising if a few of them are still near their all-time highs. Just 2% off its all-time high, Mastercard (MA -0.07%) fits this profile. This raises the following question: Should growth investors buy the stock? Let's dive into Mastercard's fundamentals and valuation to find out. 

Mastercard is a steady performer

Consumers around the world are increasingly incorporating the aspect of convenience into their everyday lives. With each passing year, more people own smartphones and are conducting purchases online. This shift in consumer preferences is giving rise to an unstoppable upward trend in the global digital payments industry. That is precisely why the global digital payments market alone is expected to grow from a transaction value of $9.5 trillion in 2023 to $14.8 trillion by 2027.

Data source: Mastercard earnings press releases.

Few companies are poised to benefit from this favorable industry trend quite like Mastercard. The company's $352 billion market capitalization earns it the status of being the biggest player in the payments industry besides Visa and its $465 billion market cap.

Mastercard reported $5.7 billion in net revenue for the first quarter, ended March 31, which equates to an 11.2% year-over-year growth rate. Because the company has extensive global operations and the U.S. dollar has been exceptionally strong, it faced a 3% foreign currency translation headwind during the quarter. Factoring this out, Mastercard's net revenue grew by 14% in the quarter.

The company's growth in key metrics outlined in the table above decelerated compared to the year-ago period. But it is worth noting that the company faced a lower bar for growth in Q1 2022 than in Q1 2023. This was due to the COVID-19-related reopening of businesses and borders around the world in Q1 2022, which provided an extra, temporary boost to Mastercard's growth rates in these metrics.

The New York-based company's non-GAAP (adjusted) diluted earnings per share (EPS) edged 1.4% higher year over year to $2.80 for the first quarter. Because there is often a lag between higher expenses and top-line growth, the company's total operating expenses rose at a faster rate (17.8%) than its net revenue during the quarter. This caused Mastercard's non-GAAP net margin to contract by 570 basis points over the year-ago period to 46.6% in the quarter. The company was able to compensate for its reduced profitability with share buybacks. That explains how adjusted diluted EPS still grew for the quarter, albeit at a much slower rate than net revenue.

Mastercard surpassed 100 million acceptance locations worldwide during the first quarter. As the company's payment network becomes more widely accepted, more consumers will likely sign up for payment methods that are handled by its payment network.

This should lead to a virtuous cycle of growth moving forward, which is why analysts believe that Mastercard's adjusted diluted EPS will grow by 20.3% annually over the next five years. For perspective, this is much higher than the credit services industry average annual earnings growth outlook of 14.5%. 

Image source: Getty Images.

A tremendous dividend grower

Stacked against the S&P 500 index's 1.7% dividend yield, Mastercard's 0.6% yield seems to be meager. But in exchange for settling on lower starting income, shareholders have more than doubled their investment in the stock over the last five years alone -- far ahead of the broader markets.

And while the company's dividend may not be attractive today, it has the potential to grow several-fold in the years ahead. This is because Mastercard's dividend payout ratio is expected to clock in below 19% in 2023. That would leave the company with the funds needed to execute its growth ambitions, repurchase shares, and reduce debt.

The stock is as good as they come

Mastercard's forward price-to-earnings (P/E) ratio of 26.3 is significantly more than the credit services industry average forward P/E ratio of 16.7. But with its impressive fundamentals and track record of enriching shareholders, this valuation is reasonable for its quality. That is why I continue to rate shares of the stock a buy for growth investors.