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Why MasterCard’s stock split will make it ‘priceless’

Talking Numbers

MasterCard announces a stock split, a $3.5 billion share buyback, and an increased dividend. Is it a buy?

Investors in MasterCard received a triple dose of good news this week. The credit card company announced it was giving more money back to shareholders by increasing its dividend by 83% and buying back $3.5 billion worth of shares. And, the company announced a 10-for-1 stock split.

If you haven't heard the term "stock split" in a while, you're not alone.

Over the past decade in a half, the amount of companies doing a stock split in a given year has fallen from nearly 100 to a little more than a dozen, according to research by Oppenheimer's John Stoltzfus.

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Of course, stock splits don't actually change anything for the company or investors' portfolios. For example, a MasterCard investor with 10 shares at, say, $800 the day before the split will have 100 shares priced at $80 after the split. No matter what, the total value will be the same.

(Read: MasterCard raises dividend by 83%; shares rise)

So, why would a company go through all that paperwork? It's because a lower stock price makes it easier for retail investors to buy and sell shares in increments smaller than large institutions.

That also explains a lot of why the markets are seeing fewer stock splits than before. Over the past decade, retail investors went from owning 35% of the shares in large-cap companies to 20%, according to data from Thompson Reuters. For smaller companies, retail ownership is even less, ranging on average between 5% and 15%. Stock ownership, in other words, is overwhelmingly dominated by institutions that don't care about stock splits because they buy and sell in bulk.

Thus, for MasterCard's stock, the real drivers behind the 4% jump in price on Wednesday are the dividend and share buyback, according to CNBC contributor Gina Sanchez, founder of Chantico Global.

"The dividend news is interesting," says Sanchez. "They still pay a very low dividend – less than 1% payout."

Sanchez sees MasterCard's dividend payouts as still lagging behind rival Visa. However, the lower relative dividend payout offers optimism in the future.

(Watch: Battle for plastic: Visa or Mastercard?)

"It signals that they can continue upping their dividend in the future," says Sanchez. "As the company matures, that dividend payout should increase over time. So, that's actually a net positive although in absolute terms today, still relatively low."

It's the $3.5 billion share buyback that is really moving the stock, according to Sanchez. The company currently has over $5 billion in cash; a share buyback is essentially the equivalent to a one-time dividend payout of some of that cash.

"The outlook for MasterCard is quite good," says Sanchez, citing their profit margins and emerging market growth. "There's a really good story behind MasterCard."

The technicals for MasterCard's chart are very positive as well, according to Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson.

"A lot of things make me nervous but the chart of MasterCard is not one of them," says Ross. "This is not a good stock chart. This is a great stock chart and it's actually getting better."

Ross sees MasterCard's stock as moving within a well-defined trend channel for the last five years. Shares recently broke above its shorter-term trend channel, a bullish indicator.

"It tells us when we break out from a trend channel that something's happening here," says Ross. "The paradigms are shifting. Momentum is accelerating. These are all good things in the short-term, with a longer-term chart to back it up. I really like this stock here."

To see the rest of Sanchez's fundamental analysis and Ross' price targets for MasterCard, watch the video above.

More from Talking Numbers:

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Why this portfolio manager is calling Starbucks ‘a home run’

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