Mastercard's (NYSE:MA) Short-Term Risks are Fueling the Downtrend

This summer certainly won't be memorable for Mastercard Incorporated's ( NYSE: MA ) investors, as the latest leg down moved the overall losses close to 10%. The stock is now in the red for the year.

Since the downtrend might not be over yet, we will examine the current state of what looks to be a reasonably expensive stock at the moment.

Check out our latest analysis for Mastercard

Changes, Bans, and lawsuits

The iconic magnetic strip is heading for museums. One of the vital elements of all credit and debit cards since the 1960s is getting phased out. Mastercard announced that it would be gradually phased out from 2024 and completely gone by 2033.

While new technologies are on the rise, not every market is looking friendly at them. For example, India's central bank barred Mastercard from bringing any new domestic customers for violating data storage rules. Mastercard, which handles 33% of payments in India, is the third company to suffer the same fate, after American Express and Diners Club International.

Meanwhile, the company is facing a record class action lawsuit in the UK. Competition Appeal Tribunal (CAT) authorized a case that alleges that Mastercard charged excessive interchange fees between 1992 and 2008. Those fees were passed onto consumers who have launched a £10b lawsuit.

Assessing the Value

While the market has experienced earnings growth lately, Mastercard's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

If you'd like to see what analysts are forecasting from now on, you should check out our free report on Mastercard .

How Is Mastercard's Growth Trending?

Mastercard's P/E ratio would be typical for a company that's expected to deliver robust growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Still, the latest three-year period has seen an excellent 61% overall rise in EPS despite its uninspiring short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 25% per annum during the coming three years, according to the analysts following the company. With the market only predicted to deliver 12% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Mastercard's P/E sits above most other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Dividend Outlook

At 0.5%, the Mastercard dividend certainly doesn't look impressive. In addition, the company bought back stock equivalent to around 1.9% of market capitalization this year.

Interestingly, dividend payouts and growth have been stable, with the annual payment of US$0.06 in 2011, growing to US$1.8 the last year, and with a payout ratio of just 24%, there is plenty of space to grow the dividend if the company wants to.

However, as we already discussed , while the returns on capital are high, the company distributes plenty of its excess cash flow to shareholders via buybacks and dividends (primarily buybacks).

Conclusion

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible. However, it can be a practical guide to the company's future prospects.

As we suspected, our examination of Mastercard's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. However, the above-mentioned risks are contributing to the short-term downtrend.

You should always think about risks. Case in point, we've spotted 1 warning sign for Mastercard you should be aware of.

If you're unsure about the strength of Mastercard's business , why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

For chart-technicians: Observe the key level at US$320.

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Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.