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MasterCard Deploys Excess Capital

MA V TSS HPY

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Following a better-than-expected 2012 financial results, last week MasterCard Inc. (MA - Analyst Report) announced higher yield to its shareholders through share buybacks and dividend increment. This further raised investors’ confidence in this Zacks Rank #3 (Hold) stock.

Accordingly, MasterCard declared a 100% hike in quarterly dividend of 30 cents per share to 60 cents. The increased dividend will be payable on May 9, 2013 to shareholders of record as on Apr 9, 2013. Based on 124 million shares outstanding at the end of Jan 2013, the company should be able to return about $75 million to its shareholders through dividends.

The latest hike takes the annual dividend to $2.40 per share from the previous $1.20 a share. This aggregates to a dividend yield of 0.46%, based on Monday’s closing price of $520.85, up from the prior yield of 0.23%.

Adding to the wealth of its shareholders, the board of MasterCard also sanctioned a new share repurchase program worth $2.0 billion, which will be effective once the buybacks under the previous program worth $1.5 billion, announced in Jun 2012, is completed. Overall, the company bought back 4.1 million shares worth $1.7 billion in 2012. As of Jan 25, MasterCard had $440 million of stock available for buybacks under the prior authorization.

The decision to amplify the shareholders’ return was supported by the company’s increased cash flow in 2012 along with its ability to generate higher cash flow and earnings in 2013 as well. MasterCard’s operating cash flow improved 9.8% over 2011 to $2.95 billion in 2012.

With no long-term debt and modest growth in expense amid better pricing, increased number of processed transactions and strong gross dollar value (GDV) growth, we believe that the company is well-fortified to accelerate growth from the improving card industry dynamics in 2013, primarily through expansion in the developing economies. This also justifies MasterCard’s aim of returning higher value from the stock.

Last week, MasterCard reported fourth-quarter 2012 operating earnings per share of $4.86, which modestly beat the Zacks Consensus Estimate of $4.79 and the year-ago quarter’s earnings of $4.03. Operating net income for the reported quarter stood at $605 million, up 17.7% from $514 million in the prior-year quarter. Operating net income also increased 15.5% to $2.77 billion in 2012 from $2.40 billion in 2011.

Simultaneously, last week close peer – Visa Inc. (V - Analyst Report), a Zacks Rank #2 (Buy) stock – sanctioned a new share repurchase program worth $1.75 billion, which is set to expire by Jan 2014. In Oct 2012, Visa also hiked its dividend by 50%. Hence, the recent expansion in MasterCard’s capital deployment is also in concurrence with maintaining its market position and shareholders’ confidence.

Others

Other strong performers in the financial transaction services sector include Heartland Payment Systems Inc. (HPY - Snapshot Report) and Total System Services Inc. (TSS - Analyst Report), both of which carry a Zacks Rank #2 (Buy).

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