MasterCard (NYSE:MA) has been on a tear this year with a 49.65% run-up in its share price even before announcing a number of shareholder-friendly measures after trading hours on Tuesday (December 10).
The company will offer a 10-to-1 stock split for common stock investors of record as of January 9, 2014. As a result of the move, total shares outstanding will rise from 120 million to 1.2 billion.
MasterCard also announced an 83% increase in its quarterly dividend from $0.60 to $1.10 per current share - $0.11 per share after the split.
The company added one more sweetener to the shareholder pot with another round of $3.5 billion in stock buybacks that will begin after the company completes the final $514 million promised under its current $2 billion stock buyback program.
“Today’s actions reflect our ongoing commitment to deliver shareholder value, as well as our confidence in the long-term growth and financial performance of our company,” said MasterCard CEO and president, Ajaypal Singh Banga.
Analysts and commentators greeted the news as very positive for MasterCard. Philip van Doorn at The Street, for example, wrote, “MasterCard has room to run in 2014.” Citigroup analyst Donald Frangetti, who in September upgraded MasterCard from a hold to a buy, sent out a note in praise of the company’s move and maintaining his buy rating. Frangetti’s price target for MasterCard is $835.00 per share ($83.50 after the split).
S&P Capital IQ’s Sonia Parechanian, while positive about the company, the new shareholder measures and the outlook for the company, maintained a hold rating, partly because the share price has already moved so high.
Parechanian praised the timing of MasterCard’s 10-for-1 split. “Companies occasionally split their stocks too early,” she said in an effort to give an appearance the company is doing well. Another company, she explained, might have scheduled out a stock split 10 times over the years rather than waiting a long time to do a 10-for-1 split. “Waiting it out is not a bad idea. It does make sense at this point, bringing the share price down to something under a $100 where people can go and buy 100 shares of it now and not have a mass investment.”
She was less impressed with the dividend boost of 83%. “The increase is nice, but it doesn’t do very much for the yield,” she said, which will still be less than 1%. “Probably more interesting is the greater allocation to share buybacks. That helps supplement earnings growth,” she said.
Parechanian is quite bullish on the company’s prospects. “MasterCard is one of the few very large cap companies that does have high growth. It is truly a growth company,” she said. MasterCard is likely to continue on the growth path in 2014 and beyond, as its growth is fueled by an expanding middle class around the globe and an improving economy in Europe and elsewhere. “The big underlying driver [of growth] is the transition away from cash globally,” she said.
Parechanian likes MasterCard’s business model. “It’s one of the most attractive business models you can imagine as an analyst. It has high cash flows and a nice return on equity.” She also likes their continuing investment in new technology and product innovation.
Parechanian balances her very positive view, however, with an awareness of “a growing regulatory risk” that companies like MasterCard and its peers may face in the future over the fees they charge consumers. “Following the most recent crisis, we now have consumer protection agencies. There is more emphasis and more focus on fees. Therefore, I think they could come under increased scrutiny.” Any limits on fees down the road could put “put pressure on revenues over the long term.”
The Bottom Line
For investors who own MasterCard, Parechanian encourages them to stay with the company. For those who are not currently MasterCard shareholders, she recommends that they “balance the risk and reward” of getting into the stock at current valuations.
MasterCard closed at 790.57 Wednesday, up 26.96 or 3.53%.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.