Dividend growth investing is a popular strategy among investors. But the emphasis can be different from person to person. Younger investors may focus more on the growth aspect than dividends, while older investors or those approaching retirement may put more emphasis on the absolute yield.
For investors who believe that they are still years from retirement, the payments processor Mastercard (MA 1.41%) may be an amazing pick. Let's analyze the company's fundamentals and valuation to better understand why.
NYSE: MA
Key Data Points
Mastercard's growth potential is electric
With nearly 3 billion credit and debit cards on its payment network, Mastercard is the clear No. 2 payments processor to Visa's card base of 4.2 billion. This helps the former to support its whopping $377 billion market capitalization, which isn't too far behind the $490 billion market value of the latter. Due to the astonishing size of Mastercard, some investors may think that future upside is quite limited. But this couldn't be further from the truth.
For one, Boston Consulting Group thinks that global payments industry revenue will compound at a high-single-digit rate annually to reach $3.3 trillion by 2031. This optimistic industry outlook is backed up by an increasing share of retail being conducted online, which is where debit and credit cards are the most common payment methods.
Not to mention that thanks to Mastercard's impressive size and scale, more merchants are accepting it as a payment method to win over business from the company's massive card base. This leads to regular growth in Mastercard's key business metrics, including gross dollar volume (i.e., total dollar volume of transactions processed on its network), cross-border volume (e.g., transactions where the merchant country differs from the issuing country), and switched transactions (the total transactions processed). That explains how the company was able to easily generate double-digit revenue and earnings growth in its most recent quarter, which is something not many mega-cap counterparts can routinely do.
As more consumers around the world adopt alternative payment methods, Mastercard's outsized growth should persist. Analysts expect that the company's non-GAAP (adjusted) diluted earnings per share (EPS) will rise by 17.5% annually for the next five years. Put into perspective, this is head and shoulders above the credit services industry average of 14.3%.
Image source: Getty Images.
Huge dividend hikes add up over time
Mastercard's 0.6% dividend yield probably flies under the radar of most dividend-oriented investors. After all, even the S&P 500 index's 1.6% yield dwarfs the company's dividend. But with Mastercard's quarterly dividend per share skyrocketing 850% in the last 10 years, such a low starting dividend can grow in a hurry.
This is especially true when considering that Mastercard's dividend payout ratio is positioned to clock in at below 19% in 2023. Combined with its high-teens annual earnings growth prospects, the dividend should have no problem growing at a double-digit clip moving forward.
Hard to go wrong at the current valuation
Shares of Mastercard have rallied 15% so far in 2023, which is in line with the rate that the adjusted diluted EPS is expected to grow for this year. Mastercard's forward price-to-earnings (P/E) ratio of 27.5 is materially above the credit services industry peer average of 17.6. But this is arguably a fair valuation premium for an industry leader with superior growth potential.
And if that wasn't enough, Mastercard's 0.6% trailing-12-month (TTM) dividend yield of 0.6% is higher than its 13-year median TTM dividend yield of 0.5%. Given that the company's fundamentals are intact, this suggests that Mastercard is a buy at the current $400 share price for dividend growth investors.
