NeutralMAMastercardMastercardVVisaVisa

1w ago on

Mastercard and Visa were heavily underperforming the market for the majority of 2026- But both have come roaring back over the last few months: Visa (V): 17.57% total return S&P 500 (SP500): 13.13% total return Mastercard (MA): 12.61% total return https://t.co/AE6LGCAMEm

MAMastercardNeutralMastercard

2w ago on

What does it mean for a stock to be a ‘growth stock’? From a capital allocation stand point, most would assume that means they reinvest a large percentage of their free cash flow back into the business. That’s how companies achieve double digit EPS growth, right? Maybe sometimes… But look at Mastercard. In 2025, Mastercard returned 88.1% of its free cash flow to shareholders: - $11.73 billion in buybacks: 71.4% of FCF - $2.76 billion in dividends: 16.8% of FCF How can a ‘growth’ company return so much cash while still growing EPS at a double digit rate? Secular growth. Growth the company can achieve without the need for reinvestment. Mastercard can process more payments through its existing network without needing a proportional increase in capital investment. It doesn’t need to build factories, carry inventory, or fund the loans behind those transactions. This entirely explains how they achieve such a high return on invested capital. Its network supports growing profits with relatively little additional capital. And those buybacks further support EPS growth by reducing the number of shares dividing up its earnings- And ironically enough, a reduced share count also increases the rate at which they can grow dividends on a ‘per share’ basis. When evaluating a stock, ask how much reinvestment it needs to produce that growth, and what return it earns on that investment. The irony is that Mastercard is widely viewed as a growth stock, but its capital allocation looks much more like a shareholder return stock. Its business requires so little capital to expand that it can pursue growth while returning most of its free cash flow through buybacks and dividends. Let’s dive deeper into what this actually looks like. Here’s perhaps one of the most important formulas to understand: Earnings Growth = ROIC x Reinvestment Rate This framework helps explain how much additional capital a business needs to support its growth. Reinvestment is measured relative to after-tax operating profit, and the return earned on that new investment is what matters. The higher the return, the less capital a company needs to reinvest to achieve a given growth rate. To illustrate Mastercard’s advantage, suppose it could earn a 50% return on new invested capital and reinvest 20% of its after-tax operating profit: 50% × 20% = 10% earnings growth A company earning a 10% return would need to reinvest 100% of its after-tax operating profit to achieve that same growth rate. Both companies achieve 10% growth… But one requires five times as much reinvestment. That difference creates room for dividends, buybacks, and other uses of capital. You can also flip the formula around: Required Reinvestment Rate ≈ Desired Earnings Growth ÷ Return on New Invested Capital For Mastercard, the appeal is that additional payment activity can generate more profit without requiring a proportional expansion of its capital base. It can fund growth while leaving substantial cash available for shareholders. Buybacks can then support additional growth in earnings per share by reducing the share count. A business that needs relatively little additional capital to grow has more flexibility to increase dividends while continuing to expand.