Mastercard Is The Ultimate Recession Blue-Chip Buy (NYSE:MA)

Warren Buffett famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

This bear market has created no shortage of incredible blue-chip buying opportunities in the world’s best companies.

But today, I want to share with you the three reasons why Mastercard (NYSE:MA) is arguably the ultimate Buffett-style bear market blue-chip buy.

One that, if you buy today, could generate the kinds of long-term returns that rich retirement dreams are made of.

Reason One: Mastercard Is As Close To God’s Own Dividend Stock As Exists

Mastercard is the highest quality company on the Masterlist, a 100% quality 13/13 Ultra SWAN.

In other words, as close to God’s own dividend growth stock as exists on Wall Street, and the ultimate Buffett-style “wonderful company at a fair price.”

MA’s bear market has been shallow so far, with a peak decline of just 26%.

But that’s because this hyper-growth Ultra SWAN is firing on all cylinders.

Earnings Update

Mastercard’s third-quarter results largely mirrored what we saw from Visa. The company continues to enjoy strong growth as it returns from pandemic-related impacts and favorable long-term secular trends assert themselves. We will maintain our $369 fair value estimate and wide moat rating and see the shares as modestly undervalued.

Net revenue was up 15% yearly, or 23%, excluding currency impacts. With about two-thirds of its year-to-date gross dollar volume coming from outside the United States, Mastercard is exposed to the stronger dollar’s negative impact. Gross dollar volume was up 11% on a constant-currency basis, and switched transactions were up 9%.” – Morningstar

Morningstar’s fair value estimate is close to ours at $375. In a tough year of slowing, growth sales were up 23% in constant currency.

Even more impressive is that 2/3rd of processing volumes are international, where growth is much slower or even negative.

Cross-border transactions have been a major factor for the business over the past couple of years, thanks to the pandemic-related decline in travel and the relatively large fees Mastercard collects on these transactions. But the more recent recovery in travel has been a major tailwind for Mastercard. Constant-currency cross-border volume, excluding intra-Europe transactions (which are priced similarly to domestic transactions), grew 53% year over year in the quarter, which marks a slight deceleration from last quarter, although growth remains quite strong. Cross-border travel-related volume is now at 124% of the 2019 level. We continue to expect a full recovery in travel spending over time, and there are likely still benefits for Mastercard ahead. However, the impact on overall revenue will likely diminish going forward as the company runs against more difficult comparisons, and this recovery could be at risk in the near term if the economy takes a negative turn.” – Morningstar

Thanks to the reopening of the global economy after the Pandemic, cross-border transactions, which are the most profitable for MA, were up 53% YOY and have now surpassed pre-pandemic levels.

That doesn’t mean MA is immune to recessions, but up until now, it’s faced big secular tailwinds that have helped its results continue to beat expectations.

The strong top line continued to benefit margins, with the adjusted operation margin (based on net revenue) improving to 57.7% from 56.7% last year. But with margins now roughly in line with pre-pandemic levels, further improvement may be more modest.” – Morningstar

That strong sales growth translates into higher margins, which many companies are struggling with this year.

• MA’s consensus estimates for 2022 and 2024 have actually increased in recent months

Metric	2021 Growth Consensus	2022 Growth Consensus	2023 Growth Consensus (Likely Recession Year)	2024 Growth Consensus	2025 Growth Consensus
Sales	25%	21%	13%	15%	12%
Dividend	10%	11% (Official)	9%	16%	29%
EPS	31%	26%	16%	19%	17%
Operating Cash Flow	37%	18%	18%	14%	25%
Free Cash Flow	33%	13%	22%	17%	NA
EBITDA	27%	25%	15%	17%	NA
EBIT (operating income)	27%	28%	15%	17%	NA

Click to enlarge

(Source: FAST Graphs, FactSet)

MA is expected to keep growing strongly through the recession.

• Pandemic EPS decline 15% (due to global lockdowns)
• Great Recession EPS growth 112%

Cash usage collapsed during the Pandemic to 18% of global sales, and that’s a trend that’s expected to continue.

Mastercard will eventually become a more cyclical growth stock. Still, for now it’s business model is relatively recession-proof, with the ability to deliver double-digit growth in 2023 despite economic headwinds.

MA’s payment processing network handled $7.7 trillion in global payments last year and that’s expected to keep growing at 8.4% CAGR through 2024, to nearly $10 trillion.

• this year, approximately 8% of global GDP is expected to flow over MA’s network

MA processes 29% of global credit card and 24% of debit card transactions, respectively, second only to Visa.

This is a wonderfully low-cost business, resulting in some of the highest profitability in the world.

That includes trailing 12-month net margins of 45% and returns on capital of 619%.

• for every $1 it takes to run the business MA generated $6.19 in annual pre-tax profit
• MA’s ROC (Joel Greenblatt’s gold standard proxy for quality and moatiness) was 42X higher than the S&P 500
• and 6X higher than the dividend aristocrats

MA’s free cash flow margins are nearly 50%, in the top 1% of the world’s companies.

• for every $1 in sales, almost half drops straight to the bottom line

That profitability has been stable or improving for two decades, confirming a wide and stable moat.

• MA continues to adapt and overcome all challenges, including disruption from alternative payment processors like PayPal and blockchain

MA’s free cash flow is expected to grow rapidly, hitting $15 billion in 2025.

• 19% annual free cash flow growth

It can grow the dividend at over 20% per year and still buy back stock at a rate of 3% per year.

Mastercard Credit Ratings

Rating Agency	Credit Rating	30-Year Default/Bankruptcy Risk	Chance of Losing 100% Of Your Investment 1 In
S&P	A+ Stable Outlook	0.60%	166.7
Moody’s	A1 (A+ equivalent) Stable Outlook	0.60%	166.7
Consensus	A+ Stable Outlook	0.60%	166.7

Click to enlarge

(Source: S&P, Moody’s)

MA’s balance sheet is a fortress with a 0.6% fundamental risk of the company going bankrupt in the next three decades.

MA has just $6 billion in net debt and a net debt/EBITDA ratio of 0.5.

• 3.0X or less is considered safe by rating agencies for this industry

It has $14.6 billion in liquidity, and operating earnings cover interest by 27X.

MA’s cash on hand is enough to repay the next four years of maturing debt, never mind the $36 billion in free cash flow it’s expected to generate.

• MA can effectively pay off all its debt within one year if it wants to

Credit default swaps are the insurance policies bond investors take out against potential defaults and serve as a real-time fundamental risk assessment tool.

The bond market agrees with rating agencies, analysts, and management that MA’s thesis is 100% intact and the company is firing on all cylinders.

• Note how MA’s price is much more volatile than its fundamental risk
• if the bond market isn’t worried about a crashing stock price, investors shouldn’t be either

Bottom Line: Master Card Is Firing On All Cylinders And Isn’t Likely To Crash As Much As Other Tech Stocks…Don’t Be Too Greedy When Buying It

Reasons To Potentially Buy Mastercard Today

Metric	Mastercard
Quality	100% 13/13 Ultra SWAN (Sleep Well At Night) Company
Risk Rating	Very Low Risk
DK Master List Quality Ranking (Out Of 500 Companies)	1 (Highest Quality On The Master List)
Quality Percentile	100%
Dividend Growth Streak (Years)	10
Dividend Yield	0.6%
Dividend Safety Score	100%
Average Recession Dividend Cut Risk	0.5%
Severe Recession Dividend Cut Risk	1.00%
S&P Credit Rating	A+ Stable Outlook
30-Year Bankruptcy Risk	0.60%
LT S&P Risk-Management Global Percentile	82% Very Good, Very low Risk
Fair Value	$375.81
Current Price	$339.37
Discount To Fair Value	10%
DK Rating	Potential Good Buy
PE	28.3
Cash-Adjusted PE	13.7
Growth Priced In	10.4%
Historical PE	28 to 33
LT Growth Consensus/Management Guidance	23.2%
PEG Ratio	0.59 (Hyper-Growth At A Wonderful Price)
5-year consensus total return potential	13% to 22% CAGR
Base Case 5-year consensus return potential	19% CAGR (2.5X the S&P 500)
Consensus 12-month total return forecast	16%
Fundamentally Justified 12-Month Return Potential	11%
LT Consensus Total Return Potential	23.8%
Inflation-Adjusted Consensus LT Return Potential	21.5%
Consensus 10-Year Inflation-Adjusted Total Return Potential (Ignoring Valuation)	6.99
LT Risk-Adjusted Expected Return	16.56%
LT Risk-And Inflation-Adjusted Return Potential	14.23%
Conservative Years To Double	5.06 Vs 15.2 S&P

Click to enlarge

(Source: DK Zen Research Terminal)

MA is trading at just 13.7X cash-adjusted earnings and a 0.59 PEG.

It can conservatively quadruple your money in a decade.

Mastercard 2024 Consensus Total Return Potential

If MA grows as expected and returns to historical fair value by 2024, it could deliver 15% annual returns.

• 50% more than the S&P 500

Mastercard 2027 Consensus Total Return Potential

If MA grows as analysts expect through 2027 (21% annually) then it could deliver Buffett-like 19% annual returns.

• about 3X higher total return potential than the S&P 500

Mastercard Investment Decision Tool

MA is as close to a perfect hyper-growth Ultra SWAN dividend growth opportunity for anyone comfortable with its risk profile. Look at how it compares to the S&P 500.

• 10% discount to fair value vs. 2% premium S&P = 12% better valuation
• 0.6% safe yield vs. 1.8% (much safer and growing at 35% through 2025)
• 140% higher annual long-term return potential
• about 2X higher risk-adjusted expected returns

Reason Two: Double-Digit Dividend Growth…Even In Recessions

Mastercard is one of the few companies whose growth estimates have been rising all year.

Metric	2021 Growth Consensus	2022 Growth Consensus	2023 Growth Consensus (Recession Year)	2024 Growth Consensus	2025 Growth Consensus
Sales	25%	21%	13%	15%	12%
Dividend	10%	11% (Official)	9%	16%	29%
EPS	31%	26%	16%	19%	17%
Operating Cash Flow	37%	18%	18%	14%	25%
Free Cash Flow	33%	13%	22%	17%	NA
EBITDA	27%	25%	15%	17%	NA
EBIT (operating income)	27%	28%	15%	17%	NA

Click to enlarge

(Source: FAST Graphs, FactSet Research Terminal)

Mastercard’s secular growth trends are so strong and its execution so good, that analysts don’t expect any significant impact from the recession.

Long-Term Growth Outlook

The median long-term growth consensus from all 40 analysts covering MA is 23.2% CAGR.

• one of the fastest growing companies on earth (faster than AMZN)

How good are analyst forecasts based on management guidance?

Smoothing for outliers, analyst historical margins of error are about 10% to the downside and 15% to the upside.

• they miss expectations outside of a 20% margin of error just 15% of the time
• 15% to 27% historical/margin-of-error adjusted growth consensus range

Analysts expect MA to keep growing at its historical rate of 24% since IPO for the foreseeable future.

Given its major secular growth tailwinds, I consider that a reasonable estimate.

(Source: DK Research Terminal, FactSet, Morningstar, Ycharts)

Analysts think MA could run circles around every popular investment strategy, and possibly double the future returns of the Nasdaq.

Inflation-Adjusted Consensus Total Return Potential

Time Frame (Years)	8.0% CAGR Inflation-Adjusted S&P 500 Consensus	8.8% Inflation-Adjusted Aristocrat Consensus	21.5% CAGR Inflation-Adjusted MA Consensus	Difference Between Inflation-Adjusted MA Consensus And S&P Consensus
5	$1,468.65	$1,526.66	$2,644.51	$1,175.86
10	$2,156.93	$2,330.70	$6,993.43	$4,836.50
15	$3,167.77	$3,558.19	$18,494.20	$15,326.43
20	$4,652.33	$5,432.16	$48,908.08	$44,255.75
25	$6,832.64	$8,293.08	$129,337.89	$122,505.25
30	$10,034.74	$12,660.73	$342,035.31	$332,000.57

Click to enlarge

(Source: DK Research Terminal, FactSet)

Even if MA can only grow as fast as analysts expect for a decade, that’s a potential 7X inflation-adjusted return.

Time Frame (Years)	Ratio Inflation-Adjusted MA Consensus/Aristocrat Consensus	Ratio Inflation-Adjusted MA Consensus vs. S&P consensus
5	1.73	1.80
10	3.00	3.24
15	5.20	5.84
20	9.00	10.51
25	15.60	18.93
30	27.02	34.09

Click to enlarge

(Source: DK Research Terminal, FactSet)

That’s potentially 3.25X the market’s returns and triple the return potential of the dividend aristocrats.

• in 2028, MA will become a dividend aristocrat
• if it doesn’t I’ll eat my hat

Reason Three: The Ultimate Buffett-Style “Wonderful Company At A Fair Price”

Over the past 14 years, billions of dividend growth investors, outside of bear markets and bubbles, have consistently paid between 28X and 33X earnings for MA.

• 90% statistical probability this range includes intrinsic value

Metric	Historical Fair Value Multiples (13-year)	2021	2022	2023	2024	2025	12-Month Forward Fair Value
5-Year Average Yield	0.52%	$338.46	$376.92	$376.92	$440.38	$871.15
Earnings	31.24	$262.42	$329.27	$379.88	$489.84	$540.76
Average		$295.63	$351.49	$378.39	$463.80	$667.30	$375.81
Current Price	$339.37
Discount To Fair Value		-14.80%	3.45%	10.31%	26.83%	49.14%	9.70%
Upside To Fair Value		-12.89%	3.57%	11.50%	36.66%	97.21%	11.31%
2022 EPS	2023 EPS	2022 Weighted EPS	2023 Weighted EPS	12-Month Forward EPS	12-Month Average Fair Value Forward PE	Current Forward PE	Current Forward Cash-Adjusted PE
$10.54	$12.16	$1.01	$10.99	$12.00	31.3	28.3	13.7

Click to enlarge

MA is historically worth about 31X earnings and today trades at 28.3X, but just 13.7X cash-adjusted earnings.

• cash-adjusted PEG of 0.59
• hyper-growth at a wonderful price

Analyst Median 12-Month Price Target	Morningstar Fair Value Estimate
$392.41 (32.3 PE)	$369.00 (30.7 PE)
Discount To Price Target (Not A Fair Value Estimate)	Discount To Fair Value
13.52%	8.03%
Upside To Price Target (Not Including Dividend)	Upside To Fair Value (Not Including Dividend)
15.63%	8.73%
12-Month Median Total Return Price (Including Dividend)	Fair Value + 12-Month Dividend
$394.37	$370.96
Discount To Total Price Target (Not A Fair Value Estimate)	Discount To Fair Value + 12-Month Dividend
13.95%	8.52%
Upside To Price Target ( Including Dividend)	Upside To Fair Value + Dividend
16.21%	9.31%

Click to enlarge

(Source: Morningstar, FactSet)

Morningstar’s discounted cash flow model estimates MA is worth about 30.7X forward earnings and that it is 8% undervalued, almost identical to my own valuation model.

Analysts expect MA to return to the upper end of its historical fair value range and deliver 16% total returns within 12 months.

• a relatively reasonable price target

Rating	Margin Of Safety For Very Low Risk 13/13 Ultra SWAN Quality Companies	2022 Fair Value Price	2023 Fair Value Price	12-Month Forward Fair Value
Potentially Reasonable Buy	0%	$351.49	$378.39	$375.81
Potentially Good Buy	5%	$333.91	$359.48	$357.02
Potentially Strong Buy	15%	$298.77	$321.64	$319.44
Potentially Very Strong Buy	25%	$250.44	$283.80	$281.86
Potentially Ultra-Value Buy	35%	$228.47	$245.96	$244.28
Currently	$339.37	3.45%	10.31%	9.70%
Upside To Fair Value (Including Dividends)		4.15%	12.08%	11.31%

Click to enlarge

MA, at its lowest point this year, was about 20% undervalued and a potentially strong buy. Today it’s a potentially good buy for anyone comfortable with its risk profile.

Risk Profile: Why Mastercard Isn’t Right For Everyone

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

Mastercard’s Risk Profile Includes

• economic cyclicality risk: bond market expects a recession in 2024 (might slow growth but probably won’t turn it negative)
• regulatory risk (domestic and international anti-trust lawsuits)
• M&A risk: including regulatory approvals
• margin compression risk: EU is working on its own network, Russia is now using China’s Unipay, all businesses hate V and MA, though they have to use their networks
• disruption risk from blockchain and Defi: MA and V are both investing in block,
• labor retention risk (tightest job market in over 50 years and finance is a high paying industry) – rising wage pressures
• currency risk (growing over time due to faster growth overseas)
• cybersecurity risk: ransomware, hackers, Russian hacker attacks

Mastercard is not without issues in the near term. Cross-border transactions, which are particularly lucrative for the networks, came under heavy pressure due to the fallout from the pandemic and a reduction in global travel. We expect a full recovery, and this should drive relatively strong growth in the near term. From a longer-term point of view, we think it is likely that smaller and more regional networks are building out capacity for cross-border transactions, which could eat into growth a bit in the coming years, but we haven’t seen a material effect yet. While this situation bears watching, Visa and Mastercard’s global networks remain unparalleled, and we think this will remain the case for many years to come.” – Morningstar

There are many upstart competing payment processing networks, including one run by the EU.

Ethereum 2.0 and sharding has the potential to

• achieve 100,000 transactions per second (compared to Visa’s 65,000 and MA’s 5,000)
• and execute transfers at 1/20th the cost of V and MA

Ethereum’s upgrades are on track for complete the Sharding upgrade in 2023.

• so far blockchain has mostly stayed in its own lane but ETH developers want to turn ETH into the “global computer” and disrupt dozens of industries including payment processing

The bond market is now 100% certain (with very high conviction) that a recession is coming in 2023.

• Bloomberg’s model also says 100% risk of a recession
• Ned Davis Research 96%
• Conference Board 94%
• 85% of CEOs expect a mild and short recession in 2023
• 44% are still planning to hire more workers
• just 14% are planning to cut growth spending

18 economic indicators point to a potential recession beginning in four to six months.

• March to May 2023
• April base-case
• agreeing with UBS and Goldman Sachs

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

Long-Term Risk Management Analysis: How Large Institutions Measure Total Risk Management

See the risk section of this video to get an in-depth view (and link to two reports) of how DK and big institutions measure long-term risk management by companies

DK uses S&P Global’s global long-term risk-management ratings for our risk rating.

• S&P has spent over 20 years perfecting their risk model
• which is based on over 30 major risk categories, over 130 subcategories, and 1,000 individual metrics
• 50% of metrics are industry specific
• this risk rating has been included in every credit rating for decades

The DK risk rating is based on the global percentile of how a company’s risk management compares to 8,000 S&P-rated companies covering 90% of the world’s market cap.

Mastercard Scores 82nd Percentile On Global Long-Term Risk Management

S&P’s risk management scores factor in things like:

• supply chain management
• crisis management
• cyber-security
• privacy protection
• efficiency
• R&D efficiency
• innovation management
• labor relations
• talent retention
• worker training/skills improvement
• customer relationship management
• climate strategy adaptation
• corporate governance
• brand management

MA’s Long-Term Risk Management Is The 139th Best In The Master List (72nd Percentile In The Master List)

Classification	S&P LT Risk-Management Global Percentile	Risk-Management Interpretation	Risk-Management Rating
BTI, ILMN, SIEGY, SPGI, WM, CI, CSCO, WMB, SAP, CL	100	Exceptional (Top 80 companies in the world)	Very Low Risk
Strong ESG Stocks	86	Very Good	Very Low Risk
Mastercard	82	Very Good	Very Low Risk
Foreign Dividend Stocks	77	Good, Bordering On Very Good	Low Risk
Ultra SWANs	74	Good	Low Risk
Dividend Aristocrats	67	Above-Average (Bordering On Good)	Low Risk
Low Volatility Stocks	65	Above-Average	Low Risk
Master List average	61	Above-Average	Low Risk
Dividend Kings	60	Above-Average	Low Risk
Hyper-Growth stocks	59	Average, Bordering On Above-Average	Medium Risk
Dividend Champions	55	Average	Medium Risk
Monthly Dividend Stocks	41	Average	Medium Risk

Click to enlarge

(Source: DK Research Terminal)

MA’s risk-management consensus is in the top 28% of the world’s highest quality companies and similar to that of such other blue-chips as

• Lowe’s (LOW): Ultra SWAN dividend king
• Target (TGT): Ultra SWAN dividend king
• T. Rowe Price (TROW): Ultra SWAN dividend aristocrat
• Nestle (OTCPK:NSRGY): Ultra SWAN global aristocrat
• Visa (V): Ultra SWAN

The bottom line is that all companies have risks, and MA is very good, bordering on good, at managing theirs according to S&P.

How We Monitor MA’s Risk Profile

• 40 analysts
• two credit rating agencies
• 42 experts who collectively know this business better than anyone other than management
• and the bond market for real-time fundamental risk-assessments

When the facts change, I change my mind. What do you do, sir?” – John Maynard Keynes

There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead, we always follow. That’s the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.

Bottom Line: 3 Reasons Mastercard Is The Ultimate Buffett-Style Blue-Chip Buy

Let me be clear: I’m NOT calling the bottom in MA (I’m not a market-timer).

Ultra SWAN quality has nothing to do with volatility; even Ultra SWANs can fall hard and fast in bear markets.

Fundamentals are all that determine safety and quality, and my recommendations.

• over 30+ years, 97% of stock returns are a function of pure fundamentals, not luck
• in the short term; luck is 25X as powerful as fundamentals
• in the long term, fundamentals are 33X as powerful as luck

While I can’t predict the market in the short term, here’s what I can tell you about MA,

• As close to God’s own dividend growth stock as exists
• safe 0.6% yield (growing 35% CAGR through 2025)
• 23.8% CAGR long-term total return guidance, almost 2.5X more than the S&P 500 and 2X the Nasdaq
• 10% historically undervalued, a potentially good buy
• 13.7X cash-adjusted PE (0.59 cash-adjusted PEG, hyper-growth at a wonderful price)
• 150% consensus return potential over the next five years, 19% CAGR, about 3X more than the S&P 500
• 2X the risk-adjusted expected returns of the S&P 500 over the next five years

If you want to sleep well at night knowing your hard-earned savings are in good hands, there is no better company to buy from than Mastercard.

If you want to buy the ultimate Buffett-style “wonderful company at a fair price” then Mastercard is just what you’re looking for.

If you want a relatively recession-resistant business with a fortress balance sheet, very good risk management and unbelievable free cash flow minting power, Mastercard is a great choice today.

While I can’t tell you what MA will do in the coming months, I can say with 80% confidence that buying it today will make you very happy in 5+ years.

And in 10+ years, you’ll likely fell like a stock market genius.

And in 15+ years? There is just one word for long-term investors buying MA today…retired;)