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What do you do when you find a stock with more than 988 million of its products in use… that holds more than $28 per share in cash… and is buying back $2 billion in stock?
I think you buy it and hold it forever. And I’m evidently not the only one…
According to Berkshire Hathaway’s (NYSE: BRK-B) most recent filing, the company just purchased 189,000 more shares of this stock. Buffett and Berkshire already had a 216,000 share stake in the company. With the new purchase, they now own 405,000 shares — a stake worth roughly $125 million.
You’ve no doubt heard of this company. In fact, you might hold one of their 988 million cards in use around the world. That’s because in total this company — MasterCard (NYSE: MA) — boasts more than 880 million accounts and racks up $545 billion in transactions each year.
But besides its size, what is it about MasterCard that has grabbed 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 investors put on their credit cards — that’s the banks’ liability. MasterCard simply earns a small percentage of each transaction that users make on its cards.
In other words, MasterCard makes more money as the number of people around the world using its cards grows. And though this number is growing daily, according to MasterCard CEO, Ajay Banga, close to 90% of all transactions in the world still use cash.
So what Buffett most likely sees is simple — There’s a massive untapped market for credit/debit cards around the world. And who better to cash in on this opportunity than the world’s second-largest credit card company?
But I bet most everyone you know already has a credit/debit card. So where is this explosive growth coming from?
The emerging markets, but more specifically — China.
At the current pace, China will overtake the United States 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 that’s the company’s growth…
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, and more than $3.5 billion in cash. This 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 such as Buffett are drawn to this stock. Perhaps that’s why the shares have outperformed the S&P 500 by more than 13 percentage points since the selloff began in late July. Just take a look at the chart:
As you can see, MasterCard has held up much better than the broader market. It was actually UP for the majority of the downturn.
Action to Take –> Going forward, I feel so strongly about MasterCard’s prospects that I’ve actually tagged it as one of my “10 Best Stocks to Hold Forever.”
Making this list isn’t easy, but I think it is pretty simple to see why the company makes the grade… and having Buffett reach the same conclusion doesn’t hurt.
– Paul TracySource: StreetAuthority
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