With a New Dividend Increase in the Cards, We’re Lifting Our Price Target
In the face of another big buyback program announcement for this Pro Portfolio holding, we're taking a step-by-step approach.
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Pro Portfolio holding Mastercard MA announced last night a new share repurchase program and a 15% increase to its quarterly dividend. In mid-November, we increased our MA price target to $540 and the dividend boost gives us reason to hike that up to $570.
We see an annualized shareholder payment of $3.04 per share boost, based on prior peak dividend yield valuation multiples for the shares. With the Wall Street consensus expecting an annual dividend more like $2.95 next year, odds are we’ll see some others adjust their MA price targets in the coming days.
When we lifted our MA price target to $540, it was a smaller adjustment compared to others. We believed the slowing rate of earnings per share growth expected in 2025 would not limit multiple expansion. Noticing that Mastercard announced its new buyback program of up to $12 billion will begin only once it utilizes the $3.9 billion left under its current $11 billion authorization, suggests it will be putting that balance to work. That effort as well as the eventual use of its fresh program will shrink the outstanding share count, helping give some extra lift to its EPS figures.
Where we may differ from the Wall Street research firms that cover the shares is not wanting to pay up for EPS that is goosed by buyback programs. When we see that happening, we’re inclined to focus on operating income and net income growth. For example, consensus EPS expectations have Mastercard delivering EPS of $16.30 next year, up from $14.48 this year. What’s important to realize is roughly $0.35 per share of that EPS increase is tied to a lower outstanding share count year over year. Said a different way, while Mastercard’s 2025 EPS is expected to grow 12.5% year over year, the company’s net income is expected to grow at a slower pace, near 10%. And that’s slower than the more than 15% Mastercard is tracking to grow its net income this year.
That brings us back to our aversion to awarding higher valuation multiples for slowing profit growth, and why we are only increasing our MA price target to $570. While the distance between this new target and the current share prices is around $40, on a percentage basis that is less than 8%; it’s not enough to warrant revisiting our "Two" rating.
We’ll look to revisit the rating when Mastercard delivers its annual outlook during the December quarter earnings season. We’ll also keep an eye on technical support levels that could bring a more favorable pick-up point for members should we see the shares pull back. Currently, that looks like the 100-day moving average, which is just below $500, but as we know these levels of support can change.
