Newport, R.I., is the small seaside town where the titans of industry such as John Rockefeller, J.P. Morgan and Andrew Carnegie used their great wealth to build castlelike vacation homes during the Gilded Age of American capitalism. Although sometimes derided as robber barons, these industrial leaders helped build America into the bastion of free enterprise it is today.
Between 1860 and 1900, the U.S. economy expanded 400%, fueled by vastly improved technology, hands-off government policy and the growth of monopolies.
Along with the industrial moguls, many regular investors who held shares in the monopolies also became wealthy. Just imagine being a investor during the Gilded Age, knowing that you owned shares in a company that basically ruled its industry.
Most U.S.-based monopolies have long since been regulated out of existence in name of fair competition. However, there are a few near-monopolies that are still creating vast wealth for investors. These natural monopolies and duopolies were in the right place at the right time to gain significant market share. Although there is competition, some of these companies are so far advanced compared with their competition that it would take governmental intervention to knock them off their perches.
StreetAuthority co-founder Paul Tracy first alerted me to one such company in 2011, and it's since more than doubled in price. Paul pointed out that the company boasts 930 million customers, manages around $2.7 trillion in transactions, and has more than 1 billion cards in use worldwide. (This company has also been on StreetAuthority's list of the Top 10 blue-chip stocks for the past several years.)
I am talking about MasterCard (NYSE: MA). While MasterCard plays second fiddle to Visa (NYSE: V), the two companies control 80% of the U.S. credit card market. If that's not a duopoly, I don't know what is.
|MasterCard boasts 930 million customers, manages around $2.7 trillion in transactions, and has more than 1 billion cards in use worldwide.|
If you read my recent article on the death of credit cards, you might be wondering how MasterCard can be such a solid stock if credit cards are on the way out.
The answer is that though physical credit cards may soon become obsolete, it's the network and technology that actually process the payments. Although the company is named MasterCard, it rightly calls itself a technology company that is in the global payment industry.
MasterCard just posted stellar third-quarter and full-year results. Net income rose 14% in the third quarter, and earnings per diluted share climbed 18%, to $7.27.
Net revenue soared 16%, to just over $2 billion; gross dollar volume increased 15%, to over $1 trillion; and operating income moved higher by 17%. MasterCard also posted operating margins of 56%.
What has me most excited about MasterCard's potential is its stock buyback program. The company repurchased about 575,000 shares of Class A common stock during the third quarter for $345 million. Management has authorized more than $900 million for further share buybacks.
Backed by a meager payout ratio of 8%, MasterCard has plenty of room to increase its forward annual dividend yield of 2.4%.
Taking a look at the technical picture, the share price is exhibiting a classic long-term uptrend. From the start of 2011, when MA was trading near $225, to this week when prices approached $760, every pullback has been aggressively bought, and the uptrend has remained intact. The 50-week simple moving average has served perfectly as a support over the entire advance.
Risks to Consider: Despite MasterCard being part of a virtual duopoly, disruptive technology is always threatening its dominance. I don't foresee a near-term innovation causing issues for the company, but it's always a possibility. Always use stop-loss orders and diversify when investing.
Action to Take --> Buying MasterCard in the $755 to $760 range makes sense. I expect to see MA trading above $1,000 within 12 months.