Is this Buffett-backed Blue Chip stock a buy?

Warren Buffett is an all-time great investor who led Berkshire Hathaway to become a powerhouse since the company took over in 1965. With an investment portfolio worth $343.2 billion, Berkshire Hathaway is packed with some of the best companies in the world. One of these companies is MasterCard (MY -0.87%)in which Berkshire Hathaway holds a 0.4% stake, valued at $1.4 billion.

But are shares of this financial services company a buy for your portfolio? Let’s look at Mastercard fundamentals and valuation to answer this question.

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Mastercard grows like a weed

Last month, Mastercard reported substantial growth in net revenue and non-GAAP (adjusted) diluted earnings per share (adjusted) when it reported results for the first quarter ended March 31.

The company recorded net revenue of $5.2 billion in the first quarter, which is equivalent to a growth rate of 24.4% over the previous year. That easily topped analysts’ consensus quarterly net revenue estimate of $4.9 billion. How did Mastercard generate revenue high enough to exceed the average analyst estimate for the ninth quarter of the last 10 quarters?

The company’s net sales growth was fueled by several factors.

First, Mastercard’s gross dollar volume grew 17% year-over-year to $1.9 trillion in the first quarter. The economic reopening that has continued around the world has more than compensated for the loss of revenue resulting from the shutdown of activities in Russia following that country’s invasion of Ukraine.

Next, Mastercard’s cross-border volumes increased 53% in the first quarter compared to the year-ago period. Indeed, cross-border travel in March was above 2019 levels for the first time since the start of the COVID-19 pandemic, according to CEO Michael Miebach.

Last (but not least), Mastercard’s switched transactions — the total number of transactions processed — rose 22% year-over-year in the first quarter. This is also due to the global economic recovery.

Mastercard generated $2.76 of adjusted diluted EPS in the first quarter, representing a growth rate of 58.6% over the prior year. That was well above analysts’ average estimate for the quarter of $2.17 adjusted EPS, and it was the ninth of the last 10 quarters the company has had.

Besides Mastercard’s higher net revenue base, this was the result of two factors. The company’s non-GAAP net margin jumped 1,040 basis points year over year to 52.3% in the first quarter. And Mastercard’s diluted weighted average number of shares outstanding fell 1.7% from a year earlier to 981 million in the first quarter.

Thanks to the encouraging outlook for the industry and the size and scale of Mastercard, analysts expect annual earnings growth of 23.3% over the next five years.

Lots of dividend growth left in the reservoir

Mastercard has increased its dividend for 11 consecutive years. And this streak is likely to continue for many years to come due to the stock’s high earnings growth potential and sustainable dividend payout ratio.

Mastercard’s dividend payout ratio is expected to be 18.6% in 2022. This allows the company to retain the vast majority of its earnings for reinvestment in the business, as well as to perform share buybacks to increase adjusted diluted EPS. This should lead to dividend growth at least in line with earnings growth for the foreseeable future.

Mastercard’s 0.6% dividend yield will not be impressive for income investors. But for investors with time to spare, Mastercard’s high growth prospects make up for the low starting yield.

A hassle-free purchase

Mastercard is one of the highest quality stocks in the world. And the valuation doesn’t seem unreasonable at the current price.

Mastercard’s forward price-to-earnings (P/E) ratio of 26 is significantly above the credit services industry average of 14.4. But since Mastercard does not provide credit to customers, the stock is largely insulated from economic downturns. This is why the premium to his industry is justified. And that also explains why analysts gave it a 12-month target price of $432, up 31% from the current stock price of $330. This makes Mastercard an attractive choice for growth investors.

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