Contents

Summary

  • MasterCard released its Q4 and FY2017 results February 1, 2018.
  • Shareholders have been richly rewarded since MasterCard became a publicly listed entity in 2006.
  • MA is one of my highest conviction stocks but I am of the opinion its price has risen beyond levels that are deemed reasonable.

Introduction

MasterCard (NYSE: MA), currently held in the FFJ Portfolio, released its Q4 and FY2017 results on February 1, 2018.

I have written posts on November 1, 2017, July 31, 2017, and February 1, 2017. This post will, therefore, be relatively brief as I will just address MA’s Valuation and Dividend, Dividend Yield, Dividend Payout Ratio, and Share Repurchases.

Q4 and FY2017 Financial Results

MA’s February 1, 2018 Earnings Release can be found here and its Earnings Presentation can be found here.

Source: MA Fourth-Quarter and Full-Year 2017 Financial Results February 1, 2018

MA continues to generate strong free cash flow (FCF). Readers should also take comfort that as at December 31, 2017, MA had a balance sheet which is like a fortress. While its current ratio (current assets/current liabilities) of ~1.57 times declined from the prior year’s level of ~1.84, the current level is still very strong.

Valuation

MA reported FY2017 diluted earnings per share (EPS) of $3.65 and adjusted diluted EPS of $4.58.

Based on the February 1, 2018 $172.93 closing stock price we arrive at a price earnings ratio (PE) of ~47.38 and an adjusted diluted PE of ~37.76.

EPS are expected to grow in the mid 20% range giving us a forward EPS of ~$4.50 and a forward EPS of ~$5.73 based on adjusted diluted earnings. The mean consensus from 37 brokers, however, is a forward EPS of ~$5.81 based on adjusted diluted earnings; the variance in broker estimates is significant with the low being $4.97 and the high being $6.31.  Given that MA released its result February 1, 2018 I don’t know whether the consensus estimate is entirely up to date.

Using the current stock price of $172.93 and my estimates of $4.50 and $5.73 from above I arrive at a PE of ~38.43 and an adjusted diluted PE of ~30.18. If I use the mean consensus from 37 brokers I arrive at an adjusted diluted PE of ~29.76.

When I wrote my November 1, 2017 post the 2018 adjusted EPS Consensus Expectation was $5.32 and the closing stock price on October 31, 2017 was $148.77. This gave us a 27.97 forward PE based on adjusted diluted earnings.

The 27.97 level at the time was high but given MA’s growth potential and wide moat qualities I deemed MA to be fairly valued but definitely at the upper end of a reasonable valuation.

Based on the current levels noted above I now view MA as overpriced.

Dividend, Dividend Yield, and Dividend Payout Ratio

MA’s dividend history can be found here and its stock split history can be found here.

In my November 1, 2017 post I wrote that I envisioned MA would announce a $0.03/quarter dividend increase effective with the February 2018 dividend; this was based on the two previous $0.03/quarter dividend increases.

On December 4, 2017, MA’s Board of Directors declared a quarterly dividend of $0.25/share representing a 14% increase over the previous quarterly dividend of $0.22/share. This dividend will be paid on February 9, 2018.

MA’s forward dividend yield is now 0.58% ($1.00 annual dividend and current $172.93 stock price).

In 2014 – 2017, MA rewarded shareholders with ~$0.515B, ~$0.727B, $0.837B, and ~$0.942B in dividends.

The $1.00/share annual dividend represents a dividend payout ratio of ~22% based on MA’s forward EPS of ~$4.50 and ~17.5% based on MA’s forward EPS of ~$5.73 based on adjusted diluted earnings. With its continued ability to generate strong FCF I see no risk to MA’s ability to service its dividend.

Share Repurchases

Not only is MA rewarding shareholders through annual dividend increases but it is also repurchasing a significant number of shares.

In early December 2017, MA announced a new share repurchase program would become effective at the completion of its previously announced $4B share repurchase program. At the time, MA had about $1.5B remaining under the existing program. By the end of FY2017, MA had repurchased ~30 million shares at a cost of ~$3.762B.

For comparison purposes I provide the following table from MA’s FY2016 10-K which reflects the total number and value of shares repurchased in FY2013 – 2016.

Final Thoughts

There is no denying that MA is a wonderful company and that continued growth will very likely transpire over the years. A wonderful company and a fair valuation, however, are two separate and distinct matters.

I view MA as being somewhat expensive at the moment and I suspect investors have bid up MA on the basis of FOMO (Fear of Missing Out).

I certainly have no intention of selling our MA shares (our average cost for the shares held in the FFJ Portfolio is ~$130) but at the same time I am reluctant to add to our current position at these lofty levels ($170+). I will patiently wait for a pullback to $160 or lower which is based on a forward EPS of ~$5.73 based on adjusted diluted earnings and a still somewhat lofty ~28 PE; unless we get a major market correction I do not foresee MA’s PE dropping to the low 20s.

Thanks for reading!

Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long MA.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.