Long-term, lucrative investing is as simple as choosing leading companies in industries with significant growth catalysts.
Few industries hold as much long-term promise as payment processing. Indeed, the massive shift from cash to alternative payments shows no signs of slowing down. Boston Consulting Group industry forecast predicts the industry will grow from $1.5 trillion in 2021 to $2.9 trillion by 2030.
Apart Visano one will benefit as much as MasterCard (MY -1.34%). Let’s take a look at the fundamentals and valuation of the latter and discuss three reasons why the stock is an obvious buy for growth investors.
1. Mastercard consistently outperforms
In late July, Mastercard shared its financial results for the second quarter ended June 30. And the company certainly didn’t disappoint analysts with its net revenue and non-GAAP (adjusted) diluted earnings per share (EPS) in the quarter.
Mastercard reported net revenue of $5.5 billion in the second quarter, generating 21.4% year-over-year growth. This is even considering the negative impact of the shutdown of activities in Russia in the first quarter of this year. That beat the average analyst forecast of $5.3 billion in net revenue. And this is the ninth quarter of the last 10 quarters that the company has accomplished this feat. Strong overall performance in Mastercard’s three key areas drove the double-digit second quarter net revenue growth rate.
Thanks to the reopening of borders, the company’s cross-border volume was up 58% over the prior year period on a currency-neutral basis. Cross-border volume occurs when the issuing country of a credit or debit card is different from the merchant country where a transaction is made.
Increased international travel helped Mastercard’s gross dollar volume grow 14% year-over-year to $2.1 trillion in the quarter in local currency, excluding foreign currency conversion. Gross dollar volume is the dollar amount of transactions authorized on the company’s payment network.
Finally, Mastercard dial-up transactions grew nearly 12% year-over-year to 30.4 billion in the second quarter. Taking into account the impact of the withdrawal of commercial activities from Russia, this would have been 22% higher for the quarter.
The company posted diluted adjusted EPS of $2.56 during the second quarter, a year-over-year increase of 31.3%. That was well above the analyst consensus of $2.36 for the quarter. How did Mastercard beat the average analyst-adjusted diluted EPS forecast for the ninth quarter over the last 10 quarters?
The company’s higher net revenue base and a 260 basis point increase in its adjusted net margin to 45.4% were the main factors driving this significant earnings growth. And a 2% reduction in Mastercard’s diluted weighted average number of shares outstanding was the other component of its robust growth in the second quarter.
2. Mastercard’s dividend can skyrocket
Mastercard’s 0.6% dividend yield is much lower than the 1.5% dividend yield of the S&P500 index. However, the company’s starting dividend yield is deceptively low.
Indeed, analysts predict that Mastercard will generate an annual adjusted diluted EPS growth of 22.8% over the next five years. Along with a dividend payout ratio that will reach around 18.5% in 2022, this sets the stage for huge dividend growth. That’s why I think the dividend will at least double over the next five years.
3. A reasonable valuation for a blue chip stock
Mastercard is a fundamentally wonderful company. It would therefore be unrealistic to expect to recover shares at an advantageous valuation.
Mastercard’s price-to-earnings (P/E) ratio of 27.6 would be high for just about any other company. But for its annual earnings growth of more than 20%, the impressive wealth builder is reasonably valued. For context, Visa’s forward P/E ratio of 25.1 is only slightly lower than Mastercard’s. Yet the latter’s annual earnings growth is well above Visa’s annual earnings growth of 18.2% forecast for the next five years. This is what makes Mastercard a great choice for growing investors.
Kody Kester holds positions at Mastercard and Visa. The Motley Fool fills positions and recommends Mastercard and Visa. The Motley Fool has a disclosure policy.