It's a transaction any MasterCard (MA +0.49%) investor would be eager to sign for. The monster credit card payments processor declared on Tuesday a substantial 45% hike in its quarterly dividend, bring it to $0.16 per share. The company also authorized a fresh, $3.75 billion share repurchase program.
That's a lot of swipes on the card. Does the company have sufficient resources to fund these new initiatives, or will it have to test or even exceed its own credit limits?
You raise, I raise
In some respects, MasterCard's dividend hike was a case of keeping up with the Joneses -- or rather, Jones, i.e., its longtime rival and fellow payments processing giant Visa (V +1.61%).
Visa boosted its payout by 20% (to $0.48 per share) this past October, and MasterCard likely felt it had to make a similar move for its stock to stay competitive. With the latter's raise, the dividend yields of the two companies are now just about equal -- roughly 0.7% on yesterday's closing stock prices.
This yield is a key factor to keep in mind when assessing whether MasterCard has the means to finance the new distribution. 0.7% is an awfully small number, almost as if the company were issuing a token dividend because it's expected to, not out of some inspired attempt at winning shareholder affection and loyalty.
It's safe to say that few investors gravitate to either MasterCard or Visa purely on the basis of these comparatively weak payouts.
Good credit
Regardless, let's look at the numbers. Even with the 45% raise, MasterCard is still living very well within its means.
All told, the new dividend will cost it around $178 million per quarter. Meanwhile, its level of cash and short-term investments -- which has ranged from $7.1 billion to $8.0 billion in the first three quarters of this year -- stood at $7.8 billion at the end of its recently reported Q3.
That's plenty of cash to fund the relatively tiny dividend, in addition to installments of share repurchases at any rate MasterCard cares to distribute them.
The new authorization replaces an existing $3.5 billion initiative, of which around $275 million remains. Even if the company were to, for some reason, hand out that remainder plus the new amount all at once, plus a quarter's worth of the increased dividend, it would still be sacrificing barely over half of that $7.8 billion.
Fundamentally successful
MasterCard investors shouldn't worry too much, or at all really, about the sustainability of the new dividend and share buyback program.
Actually, there's not an awful lot to worry about altogether with the company, which had a fine Q3 that saw both revenue (up 13% year over year) and bottom line (15%) handily beat analyst estimates.
And the future for the segment looks sunny. Around the time of MasterCard's Q3 earnings release, China's State Council (i.e., Cabinet) strongly hinted that the country would allow processors like it and Visa to operate more freely on the domestic market. Almost needless to say, that market is immense, and any payment processor stands to take in piles of revenue by capturing only a small piece of its commerce.
As for the present, times are good for MasterCard. Not only is the company fully capable of paying for its fresh dividend raise and stock repurchases, it's got more than enough financial firepower for more in the near future, even if it unexpectedly becomes generous enough to raise that dividend yield substantially.
