MasterCard (MA), Visa (V) Shareholders Can Look Forward to Higher Capital Returns - Analyst

October 1, 2012 3:01 PM EDT Send to a Friend
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While MasterCard (NYSE: MA) and Visa (NYSE: V) have been kicking-off tons of free cash flow since going public, both have returned less of that cash to shareholders relative to peers. However, with the merchant interchange litigation case nearing an end this could change, according to JPMogan analyst Tien-tsin Huang.

Huang said both could return more capital to shareholders in the form of buybacks over the next three years, then eventually higher dividends.

The analyst estimates MasterCard and Visa will generate over $9 billion and $14 billion in cumulative adjusted net income and slightly more in cumulative operating cash flows between CY12 and CY14, respectively. This represents about 16% of market cap.

"With relatively low capex needs and few large acquisition candidates, we believe MA and V can return the majority of profits to shareholders, while still investing for future growth," the analyst comments. "We note MasterCard and Visa each have ~$5 billion in unrestricted cash on hand."

Over the last three years, large cap processors returned to shareholders through dividend and repurchases 121% of next income, this versus 89% for Visa and only 24% for MasterCard. "We believe the underperformance can be at least partially explained by capital preservation ahead of the MDL 1720 outcome," the analyst notes.

With MasterCard's stated 20+% EPS growth objective through 2015, the analyst thinks management will continue to favor share repurchases over dividends over the next three years. Visa will also favor buybacks, the firm said, given approximately 100 million Class B shares that will be unlocked upon settlement of MDL 1720.

"We can envision a scenario where Visa repurchases a portion of those shares
over a multi-year period. Our estimates assume MA and V repurchase $1.6bn and
$1.0bn in stock annually in ’13 and ’14, respectively, which would represent 47%
and 20% of forecast net income. We estimate MA and V could add an additional
three and five percentage points to our forecast EPS growth rate (MA at 19% and V
at 17%), respectively, by allocating 100% of net income to share repurchases."

Beyond 2015, higher dividends could come into play. "Our analysis suggests an increased dividend (e.g., in the 2-3% dividend yield range) would require only a 40-60% income payout ratio, and would make MA and V two of the fastest growing, medium yielding stocks in the S&P 500."

Shares of MasterCard is up 1.6%, while Visa is up 2%.


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