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This Powerhouse Financial Stock Just Declared A 15% Dividend Raise. Is It Time To Buy?
Another year, another dividend raise. That has been the strategy of payment card giant Mastercard (NYSE: MA) for over a decade now, and in December it maintained that tradition with another increase in its payout for stockholders. The increase was accompanied by news of a massive stock buyback program, so Mastercard will spend much of 2025 doling out capital for stock price-supporting measures.
Let's unpack whether these changes support the buy case for the company.
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Impressive news ... at least at first glance
Mastercard announced this latest dividend raise in mid-December. The company said it is boosting its quarterly distribution by $0.10, or 15%, to $0.76 per share. This is to be dispensed on Feb. 7 to investors of record as of Jan. 9.
A 15% increase sounds impressive on the surface, as most dividend raises from large, publicly traded companies tend to fall in the single-digit percentage range. Yet there are two factors here that make it a "more of the same," situation for Mastercard.
First, the company typically hikes its payout at low-double-digit rates. After all, it continues to work from a relatively low base -- when it initiated its dividend in 2006, its first quarterly disbursement was $0.09. Even now, at well under $1 per share, even a bump of $0.10 makes for a disproportionate leap in percentage terms.
Second, Mastercard remains a relatively miserly dividend payer. Even with the new raise, the dividend yield calculates out to less than 0.6% on the stock's most recent closing price. The average of S&P 500 index component companies is more than double that percentage, at over 1.2%.
Then there is the fact that the dividend raise is eclipsed by yet another massive share buyback program launched by the company.
Concurrent with the payout hike announcement, Mastercard revealed that its board of directors has approved a fresh stock repurchase initiative totaling up to $12 billion, which is $1 billion higher than the previous authorization (enacted in December 2023). That's an awful lot of buyback funding, and it will help greatly when and if the company's share price needs a boost.
Massively marvelous margins
Mastercard has this kind of cash to throw around because its business is enormous and profitable.
One key reason for this is that, like its eternal competitor Visa, it does not provide the credit that funds the transactions on its cards. It's an "open loop" operator, as such companies are known in the card business, meaning that it functions only as a processor of transactions made through its networks. Banks and other companies are the ones actually providing the "short-term loans" for the transacting cardholders.
It's a fine middle-man business, and Mastercard is a master at it. The company's vast revenue and limited expenses result in sky-high margins; on an annual basis so far this decade, its net margin has landed consistently in the 40%-plus range.
On top of that, a global economy that's generally humming along (particularly in this country) is supporting notable revenue growth -- across the past four years alone Mastercard's top line has expanded by 64%.
The immediate future looks good, too, if recent consumer habits are any indication. 2024's Black Friday shopping holiday in the U.S. saw retailers grow sales by an average of 3.4% year over year, according to Mastercard's research arm. Not to be outdone, December's holiday season experienced an even higher rise, growing by 3.8%. Shoppers in America, an eternally crucial market for the company, are obviously eager to spend.
The dividend doesn't make all that much difference
Given that skimpy dividend yield, few investors buy Mastercard for its payout. And since a 15% bump is the rule and not the exception, the raise isn't going to make much difference to that sentiment. I'd even go so far as to say the new stock buyback program won't have a big effect either. The $12 billion repurchase amount is impressive at first glance, yes; however, if a business is weak, no amount of share self-buying is going to support its stock price.
That's why neither of these actions is crucial. What's far more relevant to investors considering Mastercard is that it is an excellent business, and it's operating in thriving economic times that will surely produce continued growth. Its valuations aren't cheap, with a five-year forward price/earnings-to-growth (PEG) ratio of 2. In my mind, though, you have to pay up for a company of this quality, at this level of profitability. And, I'd add, considerable potential for more growth even at its monster size.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
