Shares of credit card giant Mastercard (NYSE:MA) have been trading sideways for much of the last four months as they consolidate their post pandemic gains. Unlike many tech names, and particularly work-from-home stocks, Mastercard and their peers have not seen the same retracement in their stock, which speaks volumes to both the sustainability of last year’s move and their potential for this year.
And with 2021’s calendar only just put up on the kitchen fridge, it’s starting to look like all the factors are in place for the next leg of their rally to begin.
On Wednesday, Bank of America were out with an upgrade to shares, moving them from Neutral to a Buy rating. In a note to clients, analyst Jason Kupferberg said “we believe Mastercard is an ideal way to get exposure to macro/consumer spending recovery as vaccine distribution accelerates, and find risk/reward attractive as shares have traded flat the past four months".
Catching The Wave
In a way, the COVID pandemic was the perfect storm for Mastercard. Despite a fast and furious dip in March, shares were always going to do well considering how much the COVID fuelled growth in online shopping and e-commerce accelerated. Now with vaccines started to be rolled out to the masses, they stand to do well from the coming boom in post pandemic spending as something like the old normal returns.
Kupferberg believes that gains in the digital payment industry are likely to stick around, as cash continues its slow march towards becoming obsolete. This only strengthens the “long-term structural bull case” for Mastercard and industry peers like Visa (NYSE:V) and PayPal Holdings Inc (NASDAQ:PYPL). Despite the fact that consumers have leaned towards debit spending over credit in the past year, perhaps driven by an increase in caution, we should see a “narrowing of the gap between debit and credit volume growth” in the second half of 2021. It’s around this time that discretionary spending is expected to surge, with credit card heavy purchases like travel and events taking off.
This makes for an impressive bull case from the sell-side, but investors can also rely on management’s confidence. It was only last month that they upped their quarterly dividend by 10%, making sure that their multi-year record of dividend hikes remained unbroken. Increasing a dividend is one of the most bullish signals that management can give to investors about their confidence in being able to deliver and won’t go unnoticed.
On top of that, a fresh share buyback program was authorized, which will allow the company to buyback shares to the tune of $6 billion once the current program is completed. This is another strong signal to investors that management believes shares are undervalued at current prices and are more than happy to buy in themselves.
These updates come as many companies out there are still waiting to restart their share buyback programs or to reinstate their dividends. It speaks volumes to Mastercard’s self-belief in their short and long term potential that they’re willing to not only reinstate these measures but to increase them.
Investors will also be impressed by the strong cash position on the company’s balance sheet, which enables them to meet any challenges head on. Last quarter’s earning report had it at just over $10 billion, up more than 45% from the same time in 2019.
For a $350 billion company with an historical compound annual growth rate of 30%, there’s not a lot to dislike about Mastercard. The fact that shares have quiet in recent months makes them all the more attractive now for investors looking to freshen up portfolios for 2021.
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