Mastercard is the second largest financial telecom network in the world behind Visa. With a geographical reach of more than 210 countries, Mastercard allows us to use our credit, debit, and prepaid cards to make payments globally with over 150 currencies. Before the world went into lockdown amid the Covid pandemic, Mastercard processed a staggering 87.3 billion transactions amounting to a total of US$6.5 trillion in gross dollar volume.
Business Model
So how does Mastercard make money?
In any transaction, there are four participants – the cardholder, the issuer (the cardholder’s bank), the merchant, and the acquirer (the merchant’s bank). Mastercard acts as a toll operator responsible for the authorization, clearance, and settlement of payments.
Whenever Mastercard processes a payment, the banks will pay 1) a fee per transaction and 2) a percentage of the gross dollar volume to the network provider.
Mastercard classifies their revenue stream into four segments:
- Domestic assessment fees are generated based on switch volume fees.
- Cross-border assessment fees are collected similarly except that it includes currency conversion fees for international transactions
- Transaction processing fees are the switch transaction fees generated both domestically and internationally
- Other revenues are a mix of Mastercard’s consulting, data analytics and research; safety and security service; loyalty rewards; and program management services businesses all lumped into one
Dividend Profile
Since 2010, Mastercard’s dividend has been increasing at a CAGR of 39.21%, which is great.
Barring any growth in mind, Mastercard would be a great add to your dividend portfolio when their dividend yield edges closer to 1%.
As a second-half of the duopoly payment industry, Mastercard’s business has been growing steadily over the years. With a revenue CAGR of 11.9% over the last 5 years, Mastercard reported revenue of $20.9 billion in 2021 and a profit of $9.7 billion in 2021.
Cash flow for Mastercard is also very strong, coming in at $9.5 billion in 2021. With a dividend payout ratio of only 19.6%, It still has plenty of growth runway and Mastercard should have no problem paying and increasing its dividends over the next few years.
With its predictable earnings and steady growth, we should expect Mastercard to grow its dividends at an average of 15-20% in the next 5 years.
Business Risk
In an oligopoly controlled by three companies, it’s common for Mastercard to get caught up in antitrust lawsuits from time to time. For example, in 2005, Mastercard, Visa, and a number of banks including JPMorgan Chase, Citigroup, and Bank of America were sued by 12 million merchants, alleging that they colluded to inflate interchange fees and prohibited them from directing consumers toward other methods of payment.
To settle, Mastercard, Visa, and the banks agreed to pay the merchants US$6.2 billion in 2018. Under the settlement agreement, merchants will be restricted from suing the card networks over the same card-swipe-fee claims for several years.
Companies with dominant positions in the market get caught up with antitrust lawsuits repeatedly. It is a sign of Mastercard’s influence in the market that regulators must keep in check to protect the merchants.
Final Thoughts
Mastercard has been a stock market stalwart from its listing in May 2006. Besides the stock market crash in 2008, Mastercard has been on a steady upward trend ever since. If you invested $10,000 in Mastercard at its IPO, your stake would now be worth over $766K (as of October 2020).
In the near term, Mastercard looks like it will continue to ride on secular growth trends in the e-commerce and payments space. With its dominant position in an oligopolistic industry, Mastercard’s upward trend may well continue for many years to come.