MasterCard: A 'buy and hold forever' stock

Warren Buffett's stake is just one more reason for long-term investors to like these shares.

By TheStockAdvisors Oct 21, 2011 9:42AM

By Paul Tracy, Street Authority Market Advisor

With more than 988 million of its products in use, $3.5 billion in cash, and a $2 billion buyback, I consider MasterCard (MA) a 'buy it and hold it forever' stock.

And I'm not the only one who feels this way. Just a few months ago, Warren Buffett's Berkshire Hathaway bought 189,000 shares, adding to its 216,000 share stake.

MasterCard racks up $545 billion in transactions each year. But besides its size, what is it about MasterCard that has grabbed Mr. Buffett's attention?

Well for one, even though MasterCard makes credit cards, it doesn't actually take on any credit risk. It simply acts as a "toll" operator.

You see, MasterCard doesn't have anything to do with the debt that investors put on their credit cards -- that's the banks' liability. MasterCard simply earns a small percentage of each transaction.

In other words, MasterCard makes more money as the number of people around the world using its cards grows.

And though that number is growing daily, according to MasterCard CEO, Ajay Banga, close to 90% of all transactions in the world still use cash.


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So what Mr. Buffett most likely sees is simple: There's a massive untapped market for credit and debit cards around the world.

And who better to cash in on this opportunity than the world's second-largest credit card company?

So where is this explosive growth coming from? The emerging markets, but more specifically -- China. At the current pace, China will overtake the US as the world's largest credit card market by the end of the decade.

As China moves away from cash and into plastic, MasterCard will be there, growing earnings along the way. In fact, analysts expect MasterCard to grow earnings by 19.6% in the next year alone.

But what really has investors excited are some of MasterCard's recent shareholder-friendly moves.

For example, the company recently announced bumping up its existing buyback program by another $1 billion, so that it is now buying back $2 billion in stock -- roughly 5% of the shares outstanding.

The company also has less than $30 million in debt; its $3.5 billion in cash comes out to more than $28 in cash per share.

With cash in the bank, a growing business, and a shareholder-friendly focus, it's easy to see what investors like Buffett are drawn to this stock.

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Oct 21, 2011 3:53PM
Oct 21, 2011 4:26PM

Mathematically this makes no sense.  The dividend is a paltry $0.60 (a yield of 0.18% at current price levels).  If you are going to hold onto it "forever" you should get a return that is better than you can get from an insured CD (which even in the lousy market out there now you can get better than 1%).

Oct 21, 2011 9:20PM
Pathetic dividend.... basically non-existent.  It has $28/share in cash, yet pays out 60 cents in dividends?  And holding "forever" is a bad frame of mind with any stock.  I think I remember reading an article about 5 years ago that said that about Bank of America. 
Oct 21, 2011 6:55PM
   What's to stop the Chinese government from implementing policies favoring a domestic credit card processor?  I think they'll unlevel the playing field just like they've done with other industries.
Oct 24, 2011 9:40AM
Please explain to me how can you make a profit on this stock if you hold it forever
Oct 21, 2011 7:32PM
Imagine that!  An American company profiting in China.  I can hear all the Chinese now, "American companies are taking over!  They are taking all of the profit back to America!  How dare they!!!"
Oct 24, 2011 9:02PM
Hmmm - buy a stock because everyone else is.... where do I sign up?????
Oct 24, 2011 12:37PM
It just goes to show you that the" WEB-WAY" can kill you in more ways than one. 
Oct 24, 2011 3:50AM
I'm getting a 60 cent return with a Boeing stock!
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