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MasterCard’s Expense Management Results in High Margins

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Expense management

MasterCard’s (MA) rebates and incentives have grown at a faster pace than its revenue in recent quarters, mainly due to more retail clientele and increased competition. The company’s rebates and discounts rose 21.0% to $1.4 billion in 4Q16 on a nominal basis. The growth was mainly due to renewals of existing deals and continued spending.

In 1Q17, rebates and discounts are expected to rise 20.0%–22.0% on the back of higher volumes and partnerships.

Expenses

MasterCard’s major spending initiatives have been to add partnerships rather than spend on direct marketing efforts. The company’s advertising and marketing expenses fell 3% to $308.0 million on a year-over-year basis. Its general and administrative expenses, including personnel, network and processing, and professional fees, fell 2.0% to $983.0 million.

MasterCard saw total revenues of $10.8 billion in 2016. Its peers in the industry posted the following revenues in 2016:

  • American Express (AXP): $32.6 billion
  • Discover Financial Services (DFS): $7.6 billion
  • Visa (V): $15.0 billion

Together, these companies account for 2.9% of the iShares Russell 1000 Growth (IWF).

Improving margins

MasterCard has managed high operating margins of 45.0%–50.0% in recent quarters. The margins were backed by strong international and diversified growth and lower expenses, partially offset by increased rebates and a strong US dollar. Excluding non-operating items, MasterCard posted an operating margin of 49.8% in 4Q16 compared to 44.0% in 4Q15. The company’s operating expenses fell 2.0% on a nominal basis in 4Q16.

MasterCard saw higher personnel and data processing costs compared to 4Q15. However, it saw a fall in professional fees as well as other administrative expenses, reflecting strong expense management.

Next, let’s take a look at MasterCard’s valuations.

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