Basking after a great quarter and year, yesterday, the board of MasterCard Inc. (MA) declared a 100% hike in its dividend to 30 cents per share from the prior 15 cents. The increased dividend will be paid on May 9, 2012 to shareholders of its Class A common stock and Class B common stock as of April 9, 2012.
On February 9, 2012, the company paid a quarterly cash dividend of 15 cents per share to the respective shareholders of record as on January 9, 2012. This was announced on December 6, 2011.
With no long-term debt, cash and cash equivalents of over $3.7 billion and operating cash flow of $2.7 billion at the end of 2011, the company delivers solid free cash flow and is well poised to return wealth to investors through consistent dividend payouts and share repurchases, which will also help it retain market confidence.
Such an improved operating and financial leverage had previously helped MasterCard to extend its share repurchase authorization to $2.0 billion in April 2011 from $1.0 billion approved in September 2010. Going ahead, we remain confident about the company’s ability to remain cost effective and continue to return added value to its investors.
Earnings Review
Last week, MasterCard reported fourth-quarter 2011 operating earnings per share of $4.03, which came in drastically ahead of the Zacks Consensus Estimate of $3.90 and $3.16 in the year-ago quarter. Net income for the reported quarter stood at $515 million, spiking 23.7% from $415 million in the prior-year quarter.
Results for the reported quarter improved over the prior-year quarter primarily due to better pricing, an increased number of processed transactions and strong gross dollar value (GDV) growth. However, a higher tax rate and operating expenses along with the merchant litigation expense were the downsides.
For full-year 2011, MasterCard recorded operating net income of $2.4 billion or $18.70 per share as compared with $1.85 billion or $14.05 per share in 2010. Operating earnings per share also exceeded the Zacks Consensus Estimate of $18.57 per share.
Consequently, MasterCard is expected to generate earnings of $5.25 per share, as per the Zacks Consensus Estimate, escalating about 22% from the year-ago quarter. In the last 7 days, since the fourth quarter earnings release, 14 of the 25 analyst firms have revised their estimates upward, while 6 downward revisions were witnessed. For 2012, earnings are likely to increase by about 17% over 2011 to $21.82 per share.
MasterCard benefits from strong secular demand growth, meaningful international exposure, diversified product portfolio, high barriers, excellent pricing power, risk-free balance sheet and impressive operating leverage. Also, the above-average earnings growth, strong competitive position and leverage to an eventual economic recovery will result in a relative valuation premium.
However, we are concerned about MasterCard’s resilience and ability to raise prices, increased operating expenses, the detrimental effects of the Consumer Protection Act in the U.S. and scope for increasing cash flow. Hence, the cautious outlook over the near term justifies our Neutral recommendation in the long run. This is also reflected in the Zacks Rank #3, which implies a short-term Hold rating.
Besides, MasterCard’s prime peer, Visa Inc. (V) is slated to report is fiscal first quarter 2012 (ended December 31, 2011) financial results after the market closes on February 8, 2012.
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