Whether you’re young and just starting to accumulate wealth in your ISA or you’re in your 50s or 60s and thinking about winding down from work, Mastercard (MA:NYSE) is a great stock to own in a diversified investment portfolio.The global credit and debit card monster oozes high-quality, sustainable growth, and some of the most respected fund managers in the world agree. Terry Smith-founded Fundsmith Equity (B41YBW7) bought a stake last year, it’s also in the Blue Whale Growth Fund (BD6PG78) portfolio and even legendary investor Warren Buffett owns a stake through Berkshire Hathaway (BRK:NYSE).

Mastercard is familiar to millions of people, yet it remains at the bleeding edge of a structural shift away from cash to mobile, online and contactless payments.

At its core, Mastercard runs BankNet, a global payment network connecting major banks with retailers for verifying and processing card payments. It handles hundreds of millions of transactions every day, taking a small cut of transaction values, typically ranging from 1% to 3%.

This is a scalable business that produces high operating profit margins, about 58% in the first three months of 2023, and an improvement on the 55% five-year average. Returns on equity and investment have also been rising – for the former, 156% for the past 12 consecutive months compared to a five-year average of 126%, and for the latter, 50.4% versus 49.4% respectively.

Mastercard is seeking to build on its success
in consumer payments by doing more in the business-to-business space, where large numbers of transactions are currently made manually by cash or cheque, methods that are decreasing in popularity.

The impact of cost-of-living pressures on consumer spending cannot be disregarded but Mastercard’s revenues, earnings and cash flows have remained incredibly robust – the company has beaten expectations every quarter since the Covid pandemic eased up. Soaring inflation has worked in its favour, lifting prices and thus Mastercard’s take per transaction.

Analysts are confident this trend will continue. Mastercard is forecast to grow annual revenue by about 13% out to 2025. This should generate significant amounts of cash for the business.

Such reliable growth and strong returns come at a price, which means investors are being asked to pay a premium rating for the shares, which trade on 31 times forecast earnings for 2023.

Mastercard’s share price has doubled over the past five years, even with the impact of Covid, soaring inflation and rising interest rates, and we expect the stock to continue rewarding holders.

DISCLAIMER: The author (Steven Frazer) has a personal investment in Fundsmith Equity and Blue Whale Growth. The editor (Daniel Coatsworth) has a personal investment in Fundsmith Equity.

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