MasterCard Sanctions $1B Buy-Back - Analyst Blog

On Tuesday, the board of the global payment solution giant, MasterCard Inc. (MA), approved and authorized the stock buy-back program worth $1 billion class A shares through open market operations. Although the approval is effective immediately, stocks will be repurchased from time to time, depending on market conditions.

The decision for the stock repurchase came in with company's share performance in the market, where card companies such as MasterCard and Visa Inc. (V) have been experiencing price declines on account of the feared impact of the consumer protection Act signed recently in the U.S. Some regulations of this act are expected to curb the interchange fees charged on merchants for their debit card transactions. These fees are significant revenue drivers for card companies.

While Visa has already estimated that about 16% or less of its revenues will be affected from the adverse impact of these regulations, MasterCard has yet to assess its share of loss from the operation of the act. However, the actual effect of these regulations will not be witnessed before mid-2011.

Nevertheless, this provides sufficient reason behind the company's sudden decision to go for a stock repurchase activity. Firstly and undoubtedly, MasterCard's enjoys a strong cash and available-for-sale investment position along with strong retained earnings and limited debt. This not only provides an operating leverage to the balance sheet, but also provides acquisition opportunities as well as scope for initiating stock repurchase programs.

Further, with a solid free cash flow of more than $2 billion, announcement of $1 billion of stock buy-back program makes perfect sense for MasterCard, since pulling out stock from the market at this time, when prices are declining in noticeable measures, will automatically lower share count and increase the net income in the hands of the shareholders, in the upcoming quarters.

Nonetheless, MasterCard has been returning wealth to its shareholders even without any grave reason like the above. During the second quarter of 2010, the company bought back shares worth $500 million.

MasterCard's Memorandum with China UnionPay

In a separate news flow, MasterCard signed a Memorandum of Understanding (MoU) with China UnionPay in order to build a platform where both can gain from mutual aid and collaboration. While MasterCard and China UnionPay aims to boost revenue by adding more locations in places where their cards are widely accepted. This will also help MasterCard to better penetrate the China market, while generating healthy opportunities for China UnionPay to grow globally as well.

MasterCard benefits from strong secular demand growth, meaningful international exposure, high barriers, excellent pricing power, risk-free balance sheet and impressive operating leverage. Also, the above-average earnings growth, strong competitive position and leverage to an eventual economic recovery will result in a relative valuation premium. However, we are concerned about MasterCard's resilience and ability to raise prices, the detrimental after-effects of the financial overhaul act and the scope for increasing cash flow.