Investors in MasterCard (MA) are applauding the capital actions which the company announced on Monday after the market close. A stock split, a sizable repurchase program and an aggressive dividend hike sparked enthusiasm among investors.
After very strong momentum so far this year, combined with increasing valuation multiples, I would be a bit more cautious.
I stay on the sidelines.
MasterCard announced a set of capital actions on Monday after the market close, sparking great enthusiasm among investors. The board of the company announced a 10-for-1 stock split after shares have advanced towards $800 per share in after-hours trading. Note that the record date for the split is set to the 9th of January of 2014.
On top of this "cosmetic" effect, shares saw another boost on the back of an 83% increase in the quarterly dividend to $1.10 per share, on a pre-split basis. On top of that, management furthermore initiated a new $3.5 billion repurchase program.
CEO Ajay Bange commented on capital decisions, "Today's actions reflect our ongoing commitment to deliver shareholder value as well as our confidence in the long-term growth and financial performance of our company."
At the end of October, MasterCard released its third quarter results. Cash, equivalents and short term investments total $6.0 billion, while the company has no debt outstanding. As such, MasterCard operates with a rock-solid balance sheet.
Revenues for the first nine months of the year came in at $6.22 billion, up 13.2% on the year before. Net earnings rose by 15.7% to $2.49 billion, for incredible net profit margins of 40%, even after tax. Full year revenues are seen at $8.5 billion, as earnings could come in around $3.3 billion.
Factoring in gains towards $800 per share, the market values MasterCard at $96 billion, or its operating assets at $90 billion. This values operating assets of the firm at 10.6 times annual revenues and 27 times annual earnings.
The proposed dividend hike towards $1.10 per share provides investors with a modest 0.5% dividend yield.
Some Historical Perspective
Back in 2006, shares of MasterCard were sold to the general public at a price of $39 per share. Ever since, shares have seen incredibly good returns, with shares roughly increasing by a factor of twenty fold towards current levels at $800 per share. So far this year, shares have already risen some 55%.
Between 2009 and 2013, MasterCard increased its annual revenues by an expected cumulative 67% to $8.5 billion. Earnings more than doubled, increasing by an expected 125% to $3.3 billion. The company has been retiring its own shares at a modest pace in recent years, fueling earnings per share growth even more.
MasterCard's management has done a great job at creating shareholder value, as consumers continue to shift their payment method from cash to electronics. Concerns about litigations and other emerging competition have been more than offset by a strong operational performance.
Shareholders are sharing the gains resulting from the strong performance as ironically enough, MasterCard has no debt outstanding. The strong cash balances allow for the $3.5 billion repurchase program and the aggressive dividend hike. Note that as recent as the start of 2012, MasterCard's quarterly dividend was just $0.15 per share, while it now proposes a $1.10 per share payout.
Despite the aggressive payout hikes, MasterCard continues to operate with a rock-solid financial position.
Back in November of last year, I last took a look at MasterCard's prospects. I noted that the company has witnessed strong operational growth, as the strong share price performance resulted in a price-earnings ratio of 18 at the time. While I was not immediately attracted to the absolute valuation, the relative valuation compared to rival Visa (V) appeared attractive, especially given the greater emerging market exposure of MasterCard.
The strong growth, numerous joint ventures with banks, financial institutions, technology and telecommunication companies reinforces the position of the company to remain on the frontier of the global payment industry. Note that the industry might still be subject to fast and structural innovations.
At the time I advised investors to pick up some shares as an investment, or set up a pair trade with Visa. In both cases, investors have done well. Shares of MasterCard have risen some 60%, in a year's time, even when excluding after-hours gains. Shares of Visa have risen some 35%, making a pair trade profitable as well.
After the payday holiday as announced by the firm, and the premium valuation following outstanding returns this year, I remain very cautious and stay on the sidelines.