MasterCard (MA) has been in the news in the last two weeks, with the global payments giant unveiling a raft of measures that fundamentally change the investment proposition that would be shareholders face when considering the company and it’s investment merits. This article will dissect the most recent news announced by the company and how it affects the investment picture as a whole, before looking at the industry as a whole and the key players and competitors and threats and opportunities. This analysis of the business model will help to clarify whether MasterCard is delivering a master class in investing success.
All Over The News
There have been several company changing announcements made by MasterCard in the last few weeks. The one that grabbed the most headlines was the 10 for 1 stock split scheduled to take place January 9. To understand why the company took such a step a bit of history is required. The company went to the boards of the stock exchange in 2006 in a much oversubscribed initial public offering, and since then the share price has gone from strength to strength to rank among the highest (in dollar terms) on the market trading at over $800 at the time of writing, third only to tech behemoth Google (GOOG) and Priceline.com (PCLN). Using the $800 figure, the stock split means that for every one share that investors hold prior to January 9, they will receive 10 priced at $80. The effect of such a split is to attract more retail investors as well as institutional buyers, both in terms of investment, but especially short term trading as the liquidity of the stock increases ten-fold as a result. This is illustrated by the numbers, which show that the total shares on issue will swell to 1.2 billion from the current 120 million.
The second announcement that was applauded by income hungry investors was a staggering 83% increase in the quarterly dividend paid by MasterCard. At current prices, the dividend will increase to $1.10 for each share (or $0.11 after the stock split), bringing the annual yield far higher than the historical average. It also signals a positive trend, with the company more willing to return its large cash stash to shareholders rather than leave it in the bank, as the company had previously doubled its dividend on two occasions between 2012 and now. This is increasingly a demand of shareholders, with the agitation of Carl Ichan for Apple Inc. (AAPL) to do the same with the huge amount of cash on its balance sheet, a news story which is still playing out.
The third announcement, which slipped somewhat under the radar, was the inception of a share buyback program. The initiative is capped at $3.5 billion and was met with a warm reception from Wall Street with several brokers singling it out as the most likely to cause upward momentum for the share price in coming months. The buyback will be conducted on market and helped along by the increased liquidity of MasterCard (MA) share following the stock split.
The final piece of news pertaining to MasterCard was largely lost in the noise about the shareholder benefits of the above announcements. The US courts ruled in favor of the two major credit card players, MasterCard and Visa (V) who were defending a legal action from trade groups and merchants about “swipe fees” charged at the point of sale. An adverse ruling had the potential to wipe millions from the bottom line of the companies, however the result means that the overhang to the stock from the legal uncertainty surrounding the case has been removed. However, in a cautionary note, the unsuccessful groups have reserved their right to appeal and the protracted timeline of the litigation to date means that the issue may remain a problem for years to come.
So the recent announcements for MasterCard as a company are largely positive, but how do the industry dynamics play out?
A Truly Global Industry – But Who Is at the Front?
MasterCard is a global titan of payment processing, but it is not the only one. Visa (V) is the global leader in the field in terms of revenue and profit, with income just a shade over $1 billion per year higher than MasterCard. However, the employee count and overheads are also higher, which may go some of the way toward explaining the under-performance of Visa stock relative to MasterCard.
Growth in this year is also strong as the shift to plastic over cash and almost extinct check processing methods as MasterCard grew revenue by 9% while Visa grew 15% by comparison. Both companies are also looking to expand their international footprints, with Visa again growing more strongly with 20% increases in volumes internationally to MasterCard’s 11%, but with 20% in the fast growing Asia Pacific and Middle Eastern markets.
Threats to both global processing giants exist in the form of the increasing penetration of online payment methods such as PayPal and Bit-coin that bypass the traditional financial architecture of the banking and finance systems for a more peer-to-peer model or a wholly digital wallet. Prepaid debit cards are also something of a threat in that they are a substitute, however, both companies are looking to leverage their experience and technology to provide banks and lenders with secure cards that also incorporate this function.
MasterCard (MA) is a global player in a field that is attractively leveraged to spending and world population growth. However, threats do exist in the form of an aggressive and larger competitor in Visa as well as industry disruptor such as PayPal and Bit-Coin. However, the stock split and recently announced shareholder initiatives have provided strong tailwinds for the stock and greatly increase the availability of trading options over the stock.