Mastercard Creates Long Term Wealth

Factors beyond a company's underlying fundamentals can sway investor sentiment. This is why it is virtually impossible to accurately predict how an investment will perform in the short term.

Many 'investors' have been heading for the exits of late given that the days of easy money have come to an end. Rather than join the 'herd', a true investor would be wise to acquire shares in high-quality companies when they become undervalued or reasonably valued. Sure, a company's stock price can drop after your purchase. After all, nobody can consistently perfectly time every purchase. The critical thing to remember, however, is the advice Ben Graham once provided Warren Buffett when Buffett worked for Graham-Newman:

'In the short run, the market is a voting machine. In the long run, it is a weighing machine. People have been successful investors because they've stuck with successful companies. Sooner or later the market mirrors the business.'

One such high-quality company whose share price has experienced recent weakness is Mastercard Incorporated (MA).

I last reviewed MA in my November 5, 2021 post at which time it had released Q3 and YTD2022 results on October 28. Based on my analysis, I concluded that MA's valuation was too high so I elected not to add to my exposure.

On April 28, 2022, MA released its Q1 2022 results and FY2022 outlook. In this brief post, I look at MA's valuation and disclose the purchase of additional shares in what is my 2nd largest holding; Visa (V) is my largest holding and I wrote about it in this April 27, 2022 post.

Financial Results

Q1 2022 Results

Please refer to MA's Q1 2022 Form 8-K, Form 10-Q and Earnings Presentation.

In Q1, MA reported revenues above expectation. This was primarily due to stronger than expected cross-border and domestic volumes and a favourable cross-border mix and FX-related revenues.

MA - Q1 2022 Selected Financial Performance

Source: MA - Q1 2022 Earnings Presentation - April 28, 2022

Worldwide gross dollar volume (GDV) increased by 17% YoY on a local currency basis; data related to sanctioned Russian banks has not been reported to MA so the Q1 results exclude anything related to Russia.

In the US, GDV increased by 14% with credit growth of 31% and debit growth of 1%. This growth reflects the recovery of credit spending on travel.

Outside of the US, volume increased 19% with credit growth of 20% and debit growth of 18%.

Cross-border volume was up 53% globally for the quarter with intra-Europe cross-border volumes up 50%. This increase is a reflection of continued improvement in travel-related cross-border. In fact, for the first time since the onset of the pandemic, cross-border volume was above 2019 levels for all regions and cross-border travel was above 2019 levels for the first time in March.

MA - Q1 2022 Gross Dollar Volume

Source: MA - Q1 2022 Earnings Presentation - April 28, 2022

Outlook

The following results for the first few weeks of Q2 are promising and management continues to expect FY2022 net revenues to grow at the high end of a high teens rate on a currency-neutral basis, excluding acquisitions and special items. Essentially, growth expectations are unchanged from those previously communicated as the strong cross-border travel recovery and strength in consumer spending should help mitigate the loss of sizable revenues in Russia and Ukraine.

MA - Business Update Through April 21, 2022

Source: MA - Q1 2022 Earnings Presentation - April 28, 2022

In terms of operating expenses, the FY2022 forecast reflects cost savings related to Russia. Operating expenses are expected to grow at a high single-digit rate on a currency-neutral basis, excluding acquisitions and special items.

MA - 2022 Non GAAP Financial Outlook

Source: MA - Q1 2022 Earnings Presentation - April 28, 2022

The elimination of Russia-related revenues and the reduction of those from Ukraine create a headwind to achieving MA's three-year performance objectives for 2022 - 2024. MA, however, is off to a strong start in 2022 with the recovery of cross-border travel ahead of expectations. Given this, management has indicated it is too early to consider any adjustments to its three-year performance objectives.

Credit Ratings

MA's current ratings and outlook are:

  • Moody's - A1 (stable)
  • S&P Global - A+ (stable)

MA's ratings define it as having a STRONG capacity to meet its financial commitments. MA, however, is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

These ratings are acceptable for my conservative nature.

Dividends and Share Repurchases

Dividend and Dividend Yield

A the time of my previous review, MA's dividend yield was ~0.05%. This was based on a $0.44/share quarterly dividend and a ~$348 share price. In that review, I stated that I envisioned a $0.04 - $0.06 per share increase to be declared in December.

Looking at MA's dividend history, we see that the second quarterly $0.49/share dividend was distributed on May 9. Investors can expect the third $0.49 quarterly dividend to be declared in the second half of June; I expect a similar dividend in September.

Based on my recent $329.70 purchase price, the dividend yield is ~0.06%.

Toward the end of November, I expect MA will once again declare a $0.04 - $0.06/share increase in the quarterly dividend. Despite this potential dividend increase, I do not expect the dividend yield will differ much from the current level.

Share Repurchases

In FY2012 - FY2021 and Q1 2022, the diluted weighted average shares outstanding (in millions) is 1,258, 1,215, 1,169, 1,137, 1,101, 1,072, 1,047, 1,022, 1,006, 992, and 981.

In November 2021 and December 2020, MA's Board approved share repurchase programs of its Class A common stock authorizing the repurchase of up to $8.0B and $6.0B, respectively.

As of December 31, 2021, the remaining authorization under the share repurchase programs was $11.9B.

In Q1, MA repurchased 6.8 million shares totalling $2.408B at an average price of $355.13. As of March 31, 2022, the remaining authorization under the share repurchase programs had been reduced to $9.5B.

After Q1 2022 through April 25, MA repurchased an additional $0.599B.

Valuation

When I wrote my September 3 post, MA's share price was ~$342.50. FY2021 - FY2023 guidance from the brokers which cover MA was:

  • FY2021 - 32 brokers - mean of $8.13 and low/high of $7.86 - $8.47. Using the mean estimate, the forward adjusted diluted PE is ~42.1 and ~41 if I use $8.35.
  • FY2022 - 35 brokers - mean of $10.65 and low/high of $10.00 - $11.45. Using the mean estimate, the forward adjusted diluted PE is ~32 and ~30.6 if I use $11.20.
  • FY2023 - 24 brokers - mean of $13.10 and low/high of $12.30 - $14.09. Using the mean estimate, the forward adjusted diluted PE is ~26 and ~24.8 if I use $13.80.

When I wrote my November 5, 2021 post, shares were trading at ~$348 and MA had reported YTD2021 diluted GAAP EPS of $6.35 at the end of Q3 versus $4.59 at the end of Q3 2020. I conservatively estimated MA would generate $2.05 in Q4 thereby resulting in ~$8.40 in FY2021 diluted GAAP EPS. This resulted in a forward diluted PE of ~41. MA ended up generating $8.76 so my estimated valuation was a bit on the high side.

By way of comparison, MA's FY2011 - FY2020 diluted PE levels are 20.92, 22.39, 32.98, 29.61, 29.87, 28.52, 35.28, 38.11, 44.30, and 53.59.

At the same time, MA had reported YTD2021 adjusted diluted EPS of $6.06 at the end of Q3 versus $4.78 YTD2020. Using a ~$348 share price and the current forward adjusted diluted EPS guidance from the brokers which cover MA, the forward adjusted diluted PE levels were:

  • FY2021 - 27 brokers - mean of $8.26 and low/high of $8.10 - $8.37. The forward adjusted diluted PE is ~42 using the mean estimate and ~41.6 if I use $8.37.
  • FY2022 - 30 brokers - mean of $10.54 and low/high of $9.83 - $11.00. The forward adjusted diluted PE is ~33 using the mean estimate and ~31.6 if I use $11.
  • FY2023 - 23 brokers - mean of $12.93 and low/high of $12.37 - $13.93. The forward adjusted diluted PE is ~27 using the mean estimate and ~25 if I use $13.93.

In Q1 2022, MA generated $2.68 in diluted EPS versus $1.83 in Q1 2021 and $2.76 in adjusted diluted EPS versus $1.74 in Q1 2021.

Using my recent $329.70 purchase price and the current forward adjusted diluted EPS guidance from the brokers which cover MA, the forward adjusted diluted PE levels are:

  • FY2022 - 28 brokers - mean of $10.54 and low/high of $10.29 - $10.76. The forward adjusted diluted PE is ~31.3 using the mean estimate.
  • FY2023 - 31 brokers - mean of $12.68 and low/high of $11.90 - $13.38. The forward adjusted diluted PE is ~26 using the mean estimate.
  • FY2024 - 16 brokers - mean of $15.65 and low/high of $15.07 - $16.85. The forward adjusted diluted PE is ~21 using the mean estimate.

Final Thoughts

My final thoughts are unchanged from those reflected in my November 5, 2021 post.

I continue to like MA's long-term prospects and periodically add to my exposure in what was my 2nd largest holding when I completed my January 7, 2002 Investments Holdings Review.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long MA and V.

Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.