It's not a secret that the tech-heavy Nasdaq Composite has minted considerable wealth for investors for some time now. The index has nearly doubled in the past five years, generating 94% total returns, including dividends, during that time.
But what if there were stocks that were even better compounders than the index? Well, they're out there in the investment universe, if you know where to look.
Having put up 105% total returns in the past five years for shareholders, payment processor Mastercard (MA 0.07%) is one such stock. And it could be poised to continue outperforming broader markets. Let's examine the company's fundamentals and valuation to discover why.
Growth remains strong
If you're like most consumers in economically developed countries, you probably use a debit card, credit card, and/or digital wallet as payment methods on a routine basis. This is especially the case in online shopping since these are the most common payment methods by far. As emerging economies continue to develop, adoption of these payment methods will almost certainly pick up even more steam.
| Mastercard Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Gross dollar volume growth | 14% | 12% |
| Cross-border volume growth | 58% | 24% |
| Switched transactions | 12% | 17% |
Data source: Mastercard.
With nearly 3 billion credit/debit cards on its network in circulation, Mastercard is only outdone by Visa's more than 4 billion cards. The former's net revenue climbed 14% year over year to $6.3 billion during the second quarter, ended June 30.
Adjusting for the 1% foreign currency headwind from Mastercard's significant international presence and the robust U.S. dollar, currency-neutral net revenue surged 15% for the quarter.
As you would expect two years after the pandemic reopening, growth in the crucial metrics highlighted in the table above has largely slowed. This is because the lower bar to clear as global economies reopened in previous quarters has now been raised as Mastercard faces year-over-year comparisons in a mostly post-COVID world. But firmly double-digit increases in these measures is indicative that the company's growth story is still intact.
The payment processor's non-GAAP diluted earnings per share (EPS) increased by 12.9% from the year-ago period to $2.89 in the second quarter. Due to much greater income tax expense, Mastercard's non-GAAP net margin contracted by 170 basis points year over year to 43.7% during the quarter.
This diminished profitability was partly countered by a 2.6% decline in the company's diluted outstanding share count through share repurchases. That explains how adjusted diluted EPS growth lagged slightly behind net revenue growth for the quarter.
Increased acceptance of Mastercard at merchant locations around the world should bode well for the company's growth. This is why analysts predict that the company's adjusted diluted EPS will compound by 17.5% annually for the next five years. In comparison to the credit services industry's average annual earnings growth projection of 14.2%, Mastercard's potential is meaningfully better.
Image source: Getty Images.
Don't discount Mastercard's dividend growth
If you're a dividend-focused investor and aren't aware of Mastercard's significant outperformance of the broader market, its 0.6% dividend yield might not catch your attention. But this stock should be on your radar if you are at least 10 years away from needing to live off dividends.
That's because with the dividend payout ratio set to come in at just under 19% for 2023, there is huge upside from the current quarterly dividend per share of $0.57. This allows Mastercard to retain the capital necessary to take advantage of future growth opportunities, improve its balance sheet, and further reduce its share count with buybacks.
An attractive valuation for a world-class business
A business of Mastercard's caliber never seems to be cheaply valued. But with its shares currently trading at a forward price-to-earnings (P/E) ratio of 27.2, the stock doesn't look unreasonably expensive at a share price around $395.
The stock arguably deserves its valuation premium compared to the average forward P/E ratio of 18.1 for the credit services industry. Dividend growth investors who are also looking for share price growth should consider buying Mastercard stock for its above-average growth capabilities.
