Warren Buffett has invested in numerous companies throughout his illustrious career. His unbelievable track record has made him a widely followed investor for many market participants.
But of the dozens of stocks the Oracle of Omaha owns in the massive Berkshire Hathaway public equities portfolio, I'm most excited about Mastercard (MA 0.07%). Here's why.
Economic moat
Anyone who has paid any attention to Warren Buffett's words over the years knows all too well that, above all else, he looks for businesses with an economic moat. A company possesses an economic moat if it has one or more competitive advantages that help protect it from the threat of competition. If a business can fend off existing rivals and new entrants into its industry, the thinking is that it should earn outsize financial returns.
Look through Berkshire's portfolio, and you'll quickly find many companies with an economic moat. In Mastercard's case, its network effects are key to its incredible success.
Mastercard operates a gigantic payment network with tens of millions of merchants on one side and 3.2 billion of its branded cards on the other. As each group grows larger, the Mastercard network becomes more valuable. That's because merchants benefit from a bigger customer base, and cardholders gain by having so many places to shop.
This favorable setup helps explain why Mastercard's competitive positioning is virtually impossible to disrupt. I don't see how a completely new payment network would have any chance of success at finding adoption among merchants and consumers.
Outstanding financials
Besides making Mastercard's competitive position almost indestructible, network effects have resulted in the company producing superb financials. Mastercard's operating margin in the latest quarter (Q2 2023, ended June 30) was a ridiculous 58.3%. That is demonstrative of an extremely profitable enterprise.
Unsurprisingly, wide margins have generated ample amounts of free cash flow (FCF). Mastercard not only benefits from having a largely fixed cost structure but also requires minimal capital investments to grow the business. Capital expenditures totaled $1.1 billion in 2022, representing just 5% of revenue that year. Consequently, FCF came in at over $10 billion.
An active money printer affords management the ability to return cash to shareholders. Between 2017 and 2022, the outstanding share count was reduced by over 9%, thanks to consistent buybacks. And during that five-year stretch, annual dividends increased by greater than 10% each year.
Secular trend
It's easy for investors to get excited about Mastercard's future. There is still a sizable runway for cashless transactions to proliferate, especially in emerging economies. The growth of digital payments helps as well, a movement spurred by the popularity of smartphones and younger fintech businesses.
According to Grand View Research, the global market for digital payments is expected to rise at 20.8% per year between 2023 and 2030, reaching a value of more than $300 billion. This provides Mastercard with a nice tailwind supporting its growth.
Another area management is focused on is business-to-business (B2B) payments. "This is accounts payable, trusted relationships, this is invoice payments, and so forth," CEO Michael Miebach said on the Q2 2023 earnings call. He went on to point out how large the total addressable market is, particularly when compared to the consumer side. Gaining greater adoption with virtual cards that can automate payments for commercial clients is a priority.
The stock's current price-to-earnings ratio of 37.3 might give some investors pause, but this is undoubtedly one of the world's best businesses. Paying up for an ownership stake could be a good idea.
