MA stock is up 52% in the past year and 22% in the last six months.
However, the stock trades at a premium valuation. It is priced for perfection at 40 times historical earnings on a run-rate basis (current share price of $327 divided by $8.28). The $8.28 figure represents four times the company’s fourth-quarter earnings of $2.07.
Any slip-up will lead to massive selling. Even its forward expected earnings of $9.01 for 2020 implies a price-to-earnings ratio of 35 times. This is very high and also requires no mistakes by MA.
Mastercard’s Free Cash Flow and Dividend Growth
One reason investors have pushed up MA stock is because of its massive cash flow. Free cash flow (accounting for capital expenditures of $422 million) in 2019 was $7.8 billion. This was up a massive 31.7% over 2018 ($5.9 billion).
No wonder Mastercard shares are so expensive. Any time a company has 32% free cash flow growth its stock is going to skyrocket.
For example, right now the company has a $330 billion market value. A year ago the market value was $213.7 billion. At that time the FCF yield would have been 3.6% ($7.8 billion divided by $213.7 billion).
That would have been a bargain. So the stock rose by 53% in anticipation of such huge cash flow. Going forward, MA stock might rise a similar amount if this FCF growth keeps up. But if it doesn’t, expect investors to bail.
Another reason Mastercard is up so much is the dividend per share was hiked 21% to $1.60 annually. MA has a tremendous history of increasing its dividends.
In fact, over the last five years, the average increase in its dividend per share is 20.1% per year. Investors are now used to this. On a compounded basis, that means that every four years the dividend more than doubles.
So again, no wonder the stock continues to rise. Investors have come to expect an ever-growing dividend and are willing to pay up for the payouts.
At this point, MA stock has a very low dividend yield. It is just 0.5%. In other words, the stock has a super high price-to-earnings ratio and a very low dividend yield. It’s priced to perfection.
What Else Is Driving High Expectations?
Several other factors affected the stock price this year. In 2019 Mastercard’s gross dollar payment volumes grew 12%. Its cross-border payment volumes also grew 16% in terms of local currency.
In addition, Mastercard bought back 3.6 million shares for a total cost of $1 billion during Q4. For all of 2019, its share repurchases were $6.5 billion for 26.4 million shares. That means that it spent 83% of its $7.8 billion in free cash flow on share repurchases. As a result, its total shares outstanding fell by over 2% to 1.008 billion.
If you combine the dividend yield of 0.5% to the buyback yield of 2%, shareholders received a total yield of 2.5%.
The truth is that is not a very high total yield. But, again, investors are willing to pay a high price for Mastercard’s growth — especially its dividend growth — to continue.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.