Dividend growth stocks are some of the best-performing in the stock market. These companies give investors a raise every year just for holding shares. And one company has been very generous in recent years, including a 16% bump for shareholders this month.
Mastercard (MA 0.07%) just raised its quarterly dividend to $0.66 per share, payable to shareholders of record on Jan. 9, 2024. It's now paying double what it paid shareholders in 2019. And there's reason to think the fintech giant will continue to grow its payout at a similar pace for years to come.
Here's why dividend growth investors should consider adding Mastercard to their portfolio ahead of its next dividend payment.
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Turning plastic into cash
Mastercard is one of two payment networks along with Visa (V -0.23%) that nearly all credit card issuing banks use to process payments. The company processed $8.7 trillion of transactions over the last 12 months. Only Visa has processed more ($14.8 trillion).
The reason Mastercard is a top choice for credit card issuers is it's spent decades building a network of merchants that run its credit and debit cards. It's practically universally accepted all over the world. That creates a significant hurdle for new competitors to overcome, as it's taken decades for Mastercard to reach this point.
The rise of digital payments (and declining use of cash) over the last decade-plus fueled strong profit growth for Mastercard. The company can process as many transactions as consumers and businesses need with minimal additional investment in building out its network or technology.
As a result, Mastercard produces a generous operating margin. What's more, it's able to produce margin expansion over time. Through the first nine months of the year, adjusted operating margin improved 0.9 percentage points, reaching a whopping 58.6%.
Over the last three years, Mastercard's improved its free cash flow by over 50%. It produced nearly $10 billion in cash for investors over the last 12 months. And it returns nearly all of that cash to shareholders through its growing dividend and share repurchase program. Along with its announcement to increase the dividend, management said the board approved a new $11 billion share repurchase program on top of the existing authorization to buy back $3.5 billion worth of shares.
Is there room to keep raising the dividend?
After its recent dividend increase, Mastercard's dividend yields 0.64%. That might not seem like much, but if it keeps raising the dividend that could become a substantial payment in the not-too-distant future.
There are several reasons to think Mastercard can keep growing the dividend. First of all, the aforementioned share buyback program creates a lot of room. For one, it reduces the share count, therefore reducing the total amount Mastercard needs to pay in dividends. Moreover, it represents a substantially larger sum than Mastercard's dividend payments, which totaled $2.1 billion over the past 12 months. Over time, investors can expect Mastercard to shift more of its capital returns to dividends.
What's more, Mastercard is still growing quickly. As a smaller company than Visa, it has more room to grow, especially in emerging markets. Meanwhile, the secular trend in digital payments is still in the early stages, as many economies are still heavily reliant on cash (including Europe).
As such, investors should expect strong free cash flow growth over time as Mastercard's revenue grows, it leverages its network advantage to expand its operating margin, and that trickles down into exceptional free cash flow. After doubling its dividend in four years, it wouldn't be a surprise to see it double again before the end of the decade.
Management's current focus on share repurchases is a sign it sees the stock is still undervalued by the market. While shares trade for a premium to Visa at 37 times trailing earnings (compared to 31x), the premium may be worth the price. Mastercard is growing faster, and analysts expect it to exhibit substantially faster growth on its bottom line over the next five years than its bigger competitor. As such, it's worth adding Mastercard to any dividend growth portfolio, as you can buy shares at a fair price and receive annual raises for the foreseeable future.
