MA - 2 Dividend Growth Names For The Long-Term Investor

2023-12-28 11:53:55 ET

Summary

• December has seen continued momentum in the equity market due to anticipation of rate cuts in the coming year.
• The Dow Jones Industrial Average and Invesco S&P 500 Equal Weight ETF have shown strong results, reflecting broader participation is finally happening.
• Expensive growth stocks like Microsoft and Mastercard may still be worthwhile investments for long-term investors that also provide significant dividend growth.

Written by Nick Ackerman.

After a strong November for the overall equity market, as risk-free Treasury Rates retreated, December has continued that momentum. The driving force is the anticipation of rate cuts heading into the coming year, which remains the key focus. This has allowed the pressure to come off of more value-oriented sectors of the market and ultimately see a widening out in the participation of the upside. This can be reflected in the Dow Jones Industrial Average (DJI) and Invesco S&P 500 Equal Weight ETF ( RSP ), which have put up some strong results. RSP even rivaled the NASDAQ Composite (COMP.IND) for a brief period in the first half of December.

I think it's also interesting to note that we previously had a longer-term perspective of going back to mostly when equities began selling off. We'll be able to see why the Dow Jones Industrial Average is getting coverage of hitting new all-time highs while tech actually isn't, despite the Magnificent 7 being such a driving force of the results throughout 2023.

To generalize, the rate hike-driven selloff began around the start of 2022, so for simplification purposes, we'll choose that as our starting time. During this period, the tech-heavy Nasdaq Composite still hasn't produced a positive result, as 2023 was simply the index clawing back its disastrous 2023 results. In fact, it hit about perfect at the start of the year in terms of the Nasdaq hitting a low during this period before recovering.

Another interesting thing to note is that the RSP has produced a nearly identical result during this period in terms of its price percentage change. If we include total return results, RSP is a bit better due to the higher yield it is able to produce. However, in the grand scheme of things, RSP (expense ratio 0.20%) is at about a 1.66% yield, and Fidelity Nasdaq Composite Index ETF ( ONEQ ) (expense ratio 0.21%) is at 0.68%. So, we aren't seeing a massive difference, but there is some small contribution.

To close out December, we could still see a Santa Claus rally that often occurs, and that possibly continues to lift equities. The next CPI report isn't due until January, so that's one report we don't have to worry about that could disrupt the momentum.

The overall strength of the move higher in such a short period of time on its own could be the reason we don't see a Santa Claus rally, though. Such a strong move in such a short period of time often starts sending off short-term oversold technicals that could cause things to cool.

For example, the RSI is a popular and basic measurement of being overbought or oversold conditions. I readily admit that I'm not a chartist or technical investor because I'm a longer-term dividend-oriented investor. That said, RSI on SPY is pushing ~75 . Anything over 70 indicates overbought conditions, and below 30 indicates oversold conditions.

Microsoft And Mastercard

Today, I wanted to take a look at the more "expensive" names. That would include Microsoft Corporation ( MSFT ) and Mastercard Incorporated ( MA ). Both of these names are at or near their 52-week highs recently, and not only that, but they were also at their all-time high levels.

I'm mainly a value-oriented investor, which often leads to a more balanced approach of relatively higher yield and fair dividend growth. This tends to include exposure to utilities, REITs and consumer staples.

In fact, just last month, I mentioned 4 names to build one's passive dividend income heading into 2024 that were related to these sectors. That included NextEra Energy ( NEE ), WEC Energy ( WEC ), Realty Income ( O ), and Conagra Brands ( CAG ). Those are positions that seem set to be particularly strong performers if rates come down over the next year or two.

However, with MSFT and MA incorporated into the portfolio, those are names that are much more on the growth side of the fence. They come with relatively low yields but substantial dividend growth rates historically. The dividend growth rate for these names is also expected to be still quite meaningful going forward if their earnings projections come to fruition.

MSFT currently sports a yield of 0.81%, but they have managed a 10-year CAGR of dividend growth of 11.14%. MA has been able to manage a dividend CAGR of 26.93% for the last decade, but it sports a 0.62% current dividend yield. The growth rate for MA has come down, with the latest being an excellent 15.8% increase.

That being said, going back to valuations, the shares of these companies could be considered more expensive. Generally, one doesn't want to buy when a share price is making new highs because the thought is that the next direction is often lower. That might be true, or it might not be, though.

The RSI for MA is making it look like it is on the higher end in terms of valuation for the short term.

MSFT, which has come off its all-time high of ~$384 that it touched at the end of November, is looking more about the middle of the road in terms of its RSI .

All that said, equities can go a long time, making new highs or only having mild dips before a more substantial, market-wide disruption occurs that can often take these high P/E stocks down with it. In the case of MSFT, it is a substantial part of the "market" on its own. Part of the Mag 7 names, MSFT is the second-largest position in SPY at a weighting of 6.53% . Therefore, MSFT is going to have a meaningful sway on which direction the market is moving.

It's also important to note that equities such as MSFT and MA have attractive growth trajectories. Thus, what might be expensive today won't be expensive when we look out a couple of years down the road. That is, even if their share prices don't move over the next two or three years, P/E can come down on its own. This is why an investor who has a longer-term time horizon of several years or even decades probably doesn't need to fret too much about their entry price.

In looking at MSFT, we can see the declining forward P/E based on the earnings forecasts provided by analysts. Over the coming five years, analysts estimate that MSFT will grow its earnings by around 14.5%. MSFT has quite a regular history of beating analyst expectations in 15 out of the last 16 quarters. That has the possibility of making it so these could actually be considered on the lower end of what earnings could be anyway.

The forward P/E might be over 33x now, but it only takes a few years to get it below 25x, should they meet these forecasts.

MA's earnings estimates show that it is expected to grow a touch faster, at an average of ~16.5% in the next four years. I'm using four years here instead of five, so it isn't an exact comparison, but that's because MA only has one analyst with a target provided in 2027.

Again, for MA, we see a similar story. If you have a few years to hold the investment, it goes from being what looks like an incredibly expensive stock to a more moderately priced one. Interestingly, the market here does seem to be a bit more efficient in that MA is trading at a higher relative forward P/E to MSFT, but given the higher growth expected, this can make sense.

Admittedly, these still trade over the market multiple. However, on a relative historical basis, they aren't necessarily that expensive. These names have quite consistently traded at richer multiples to the overall market.

Of course, this is where growth comes in and the outlook for growth. It is why I noted that the market looks more efficient here, with MA being a bit more richly valued than MSFT, given their earnings forecast.

If more growth is expected, that means a company's shares can trade at a richer P/E. This is where the price/earnings-to-growth ratio ("PEG") ratio can come in. This is another helpful fundamental valuation metric that can help provide a basis for valuing an investment. In this case, MA looks like the cheaper of the two.

Now, I know these two aren't in the same category and aren't direct comparisons, but it can still provide some context. That being said, MA was actually, until earlier this year , in the technology sector along with MSFT. It was shifted over to the financial sector. The financial sector is often associated with value-oriented names, but MA is clearly a growth name in the financial sector.

The reason MA was formerly (and what I believe actually makes the most sense) in the tech sector is that the company facilitates the network for transactions. They just simply provide the infrastructure to accomplish the payments. For their services and the right to utilize their network, the company collects fees from the swipes and transactions.

Conclusion

Overall, these names aren't dirt cheap (clearly) and I'm not trying to imply that they are. What I am trying to convey is that for longer-term investors who have some time, and the more time, the better, these are still worthwhile names. Therefore, what is expensive today might not be so expensive when you have a few years to look down the longer-term road.

Generally speaking, the younger investor is going to have less capital to invest now, so they'll naturally end up utilizing a dollar-cost average approach. That means they'll take advantage of some of the lows as well as some of the highs over the years.

That's an approach that can still work for older investors as well, so don't be afraid to use it. When investing, it doesn't have to be all or nothing. Implementing an income strategy doesn't have to be all about as much yield as you can take in today. Incorporating alongside a high-yield strategy could be a dividend growth strategy, helping to ensure a more balanced approach.

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