1 Buffett Stock to Hold Forever

Warren Buffett’s portfolio is a perennial source of ideas for investors. Though many observers focus on large holdings like Coca-Cola and Apple, there are also lessons to be learned from the smaller positions Berkshire Hathaway has taken over the years.

One of these is credit card giant MasterCard (NYSE:MA), in which Buffett holds a $1.83 billion stake. Here’s why MasterCard may be one of the top Buffett stocks to hold forever.

Why MasterCard Is a Great Long-term Hold

The first and most obvious reason to hold MasterCard is the fact that the company has a strong moat. 43% of American adults have a MasterCard credit or debit card, and the company has a total of about 309 million cards in circulation.

Only Visa, with 385 million cards and a presence in the wallets of about 52% of American adults, has a larger market share.

In addition to this strong competitive position, MasterCard offers rock-solid fundamentals that investors would be hard-pressed to find in almost any other stock.

MasterCard’s trailing 12-month net margin is 46.1%, and its return on equity during that time has been 183.7%. Here, MasterCard handily beats out Visa, which reported a 51.2% return on equity.

The credit card industry in general is also in a growth cycle. Americans are increasingly putting purchases on credit cards, resulting in a record level of both spending and account balances. This dynamic was largely to credit for a surge in Visa shares last month, and similar market dynamics are likely to affect MasterCard over the coming quarters.

Investors may also find MasterCard appealing as a dividend growth opportunity. Right now, MA shares only yield 0.6%. The payout ratio, however, is a very modest 21.0%, giving management more than enough room to increase payouts going forward.

Given the fact that the stock’s dividend has increased at a compounded annual rate of 12.5% in the last three years, the company seems to be taking advantage of its opportunity to return more cash to its shareholders.

Finally, MasterCard has also been repurchasing its own shares at a steady clip. In December, the company authorized an $11 billion share repurchase plan. Combined with a $9 billion authorization a year earlier, this makes for $20 billion allocated to share buybacks in just two years.

Since the company began buying back stock in 2011, the number of outstanding shares has dropped from 1.28 billion to just 946 million.

Combined, these factors make MasterCard look like a good choice for long-term investors. The stock offers a combination of a strong moat in a growing market, probable dividend growth, share repurchases that are likely to support higher prices and excellent financial performance. Extrapolated out over many years, these trends could allow MasterCard to deliver very strong total returns.

Does MA Still Look Like an Attractive Buy?

At first, MasterCard looks fairly pricey at 32.2 times forward earnings, 17.0 times sales, 1.8 times earnings growth and 30.5 times cash flow. None of these metrics is egregious on its own, but collectively they do paint a picture of a stock that trades at a hefty premium.

These high valuations, however, may be justified. In the coming 3-5 years, analysts expect to see MasterCard’s earnings rise by an average of 16.7% annually. The next year alone could see revenues rise by more than 12%. Given these high rates of potential growth, MasterCard could still be slightly undervalued.

Analyst ratings seem to support this view, with nearly 90% of analysts rating MA as a buy. The median target price for the stock over the next year is $514, representing a gain of over 11.5% from the current trading price.

Know the Risks

Like any stock, MasterCard also carries risks investors should understand. One of these is the fact that rising levels of credit card debt have the potential to go too far.

Though more credit card spending drives higher revenue for card issuers, the level of debt on cards can become too high, causing users to become delinquent.

Recently, delinquency rates have risen dramatically. About 18% of consumers have already maxed out their cards, and continued strong spending could lead more into this category in the near future.

MasterCard could also face a new competitor in the near future. At the moment, the company’s only meaningful contender of a similar scale is Visa. In February, though, Capital One made an offer to purchase Discover.

If that deal goes through, the combined business would become America’s largest credit card firm in terms of loan volume. This risk of new competition suddenly arriving on the scene is also a drawback for Visa, as both companies will likely face renewed pressure.

Is MasterCard a Stock To Buy and Hold Forever?

With a share buyback in place, strong fundamentals and future dividend payout increases on the horizon, Mastercard is likely a stock to hold forever.

It remains a very strong business with good potential for continued growth. A combination of rising revenues and earnings, dividend growth and an aggressive buyback program are all major positives for this stock.

Though MA trades at fairly high multiples, the stock doesn’t look particularly overvalued given its performance. Furthermore, MasterCard’s position as one of the top two credit card issuers will likely sustain it for many years to come.

Even if Capital One and Discover merge, MasterCard and Visa will likely still be able to hold their own. Given that the growth of the credit card industry as a whole remains strong, the market appears to have more than enough space for MasterCard to continue its stable, steady growth story.

MasterCard’s ability to produce long-term returns can best be illustrated by Warren Buffett’s own holdings. Buffett paid an average of $210 for his shares, most of which were acquired in 2014. At today’s price of about $460, Buffett has gained about 120%.

In addition, the Berkshire stake produces over $10.5 million in dividends. Though small to an investment company of Berkshire’s scale, these numbers show how successful investors who have been willing to buy and hold MasterCard have been over the past 10 years.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.