The upcoming stock split could interrupt the relentless gains by MasterCard (NYSE:MA). While performing a split technically has no financial impact on investors, the mechanics of the split greatly impacts the psyche of investors.
As most everybody knows, MasterCard operates a payments processing network, connecting consumers, financial institutions, merchants, and businesses in more than 210 countries around the globe. The company competes against Visa (NYSE:V) in a near duopoly for the processing of credit card payments.
Investors might find it surprising that MasterCard is now worth $100 billion and Visa tops out at around $145 billion. Most people see the fees charged by these payment processors as excessive giving rise to the bitcoin and privately held Square that attempt to supplant these services and costs.
Stock Split Thesis
The theory of the stock split dates back to a time when trades were made in round lots of 100 shares. Having to purchase 100 shares of a $100 stock would prevent most investors from the market making a stock split a requirement to keep the price low enough. In the 1990's, stock splits occurred on a routine basis with the bull market pushing stocks higher and higher. The market was so irrational at the time that stocks that split typically had a big run prior to he actual split.
The definition of a stock split from Investopedia:
A corporate action in which a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.
One of the consequences of the stock split mania back in the 1990's has been an almost negativity placed on the concept. Stocks no longer split considering the clear evidence of the high prices of popular tech stocks Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG).
Baron's noted that only 14 firms split their shares in 2013. The number is near the all-time low and far below the average of 50 since 1980.
MasterCard Split Details
Back on December 10, MasterCard announced plans to execute a 10-for-1 stock split of the common stock with a record date of the close of business on January 9, 2014. Consequently the shares outstanding will increase from 120 million to 1.2 billion. As well, the company announced an increase in the share repurchase plan to $3.5 billion and an 83% increase in the dividend to $1.10 on a pre-split basis.
In reality, the split does nothing other than convert 100 shares into 1,000. The value in a brokerage statement will be the same the following day. The stock though surged on the announcement and the limited dividend and share buyback couldn't have done the trick. Remember that MasterCard is an $800 stock with a $100 billion market value. A $3.5 billion share buyback doesn't go far and a $1.10 dividend doesn't add up very fast.
Considering the large gains over the last several years, MasterCard might be setting up a peak in the stock. How many investors that will have 1,000 shares might sell 100 shares to lock in profits? This constant drip of shares from investors lock in small portions of profits will impact the supply and demand balance for the stock.
For a financial with a market cap of $100 billion and a bigger competitor, MasterCard trades at a lofty valuation of nearly 27x forward earnings. Even more concerning is the 12x sales multiple. As an entrepreneur, the payment processing sector would have a wide appeal considering the extraordinary margins generated by the duopoly of MasterCard and Visa. MasterCard generated an astounding operating margin of 56% during Q313.
The chart below shows a similar pattern to the initial gains from the V.F. Corp (NYSE:VFC) more traditional four-for-1 stock split. MasterCard gaped up on the day of the announcement and hasn't looked back.
The retailer saw the similar gap up followed by strong gains up to the point of the split. Since the new shares started trading on Dec. 23, the stock has hit the pause button. MasterCard investors might be wise to follow VF Corp over the next month to see if it doesn't rollover. The gap up and subsequent gains weren't warranted based solely on the meaningless split news.
Both MasterCard and Visa are leading the cashless revolution around the world, but new options are starting to pop up to supplant that dominance. The news that Overstock.com (NASDAQ:OSTK) raked in $126,000 in first day sales from allowing bitcoins could be a sign of a direct attack on the high margins of payment processors. The $100 billion market cap, operating margins with nowhere to go but down, and the 10-for-1 split just might be the bell ringing the top in MasterCard.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.