This phenomenal dividend growth stock just increased its payout by 16%

By | December 23, 2023

Getty Images investor views a financial diagram on a laptop.-1200×675-128554e

Dividend growth stocks are among the best performing in the stock market. These companies give investors a raise every year just for owning stock. And one company has been very generous in recent years, including a 16% increase for shareholders this month.

MasterCard (NYSE:MA) just raised its quarterly dividend to $0.66 per share, payable to shareholders of record on January 9, 2024. It is now paying double what it paid to shareholders in 2019. And there’s reason to believe the fintech giant will continue to increase its payout at a similar level. pace for the coming years.

This is why dividend growth investors should consider adding Mastercard to their portfolio ahead of the next dividend payment.

A person looking at a graph on a laptop.A person looking at a graph on a laptop.

Image source: Getty Images.

Turning plastic into cash

Mastercard is partnered with one of two payment networks Visa (NYSE:V) which almost all credit card issuing banks use to process payments. The company processed $8.7 trillion in transactions in the past twelve months. Only Visa has processed more ($14.8 trillion).

The reason Mastercard is a top choice for credit card issuers is that it has spent decades building a network of merchants that manage their credit and debit cards. It is almost universally accepted around the world. That creates a significant hurdle for new competitors to overcome, as it took Mastercard decades to reach this point.

The rise of digital payments (and the declining use of cash) over the past decade has driven strong earnings growth for Mastercard. The company can process as many transactions as consumers and businesses need, with minimal additional investment in building out its network or technology.

As a result, Mastercard generates a generous operating margin. Moreover, it is able to increase margins over time. During the first nine months of the year, adjusted operating margin improved by 0.9 percentage points, to a whopping 58.6%.

Over the past three years, Mastercard has improved its free cash flow by more than 50%. It delivered nearly $10 billion in cash to investors over the past 12 months. And the company is returning almost all of that money to shareholders through its growing dividend and stock buyback program. Along with the announcement to increase the dividend, management said the board of directors approved a new $11 billion share repurchase program, in addition to the existing authorization to buy back $3.5 billion of shares.

Is there room to further increase the dividend?

After the recent dividend increase, Mastercard’s dividend yields 0.64%. That may not seem like much, but if the dividend continues to rise, it could become a substantial payment in the not-too-distant future.

There are several reasons to think Mastercard can continue to raise its dividend. First of all, the aforementioned share buyback program creates a lot of room. First, it reduces the number of shares, which reduces the total amount Mastercard has to pay out in dividends. Furthermore, it represents a significantly larger amount than Mastercard’s dividend payments, which totaled $2.1 billion over the last twelve months. Over time, investors can expect Mastercard to convert a greater portion of its capital returns into dividends.

Moreover, Mastercard is still growing rapidly. As a smaller company than Visa, it has more room to grow, especially in emerging markets. Meanwhile, the secular trend in digital payments is still in its early stages, as many economies are still heavily dependent on cash (including Europe).

As such, investors should expect strong free cash flow growth over time as Mastercard’s revenues grow. Mastercard is leveraging its network advantage to grow its operating margin, which is trickling down to exceptional free cash flow. After doubling the dividend in four years, it wouldn’t be a surprise if it doubled again before the end of the decade.

Management’s current focus on share buybacks is a sign that the company sees its shares as still undervalued by the market. While shares trade at a premium to Visa at 37 times trailing earnings (compared to 31x), the premium may be worth the price. Mastercard is growing faster and analysts expect the company to show significantly faster growth than its larger competitor over the next five years. That’s why it’s worth adding Mastercard to any dividend growth portfolio because you can buy shares at a fair price and receive annual increases for the foreseeable future.

Should You Invest $1,000 in Mastercard Now?

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Adam Levy has positions in Mastercard and Visa. The Motley Fool holds and recommends positions in 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.

This phenomenal dividend growth stock just increased its payout by 16% originally published by The Motley Fool

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