When considering investing hard-earned capital in a company, one of the first things to look at is whether or not their products and/or services are ubiquitous.
That’s why I commonly talk about and invest in dominant companies whose products and/or services can be found pretty much everywhere, across the entire globe.
And what could be more ubiquitous than credit cards?
In fact, I can tell you that I recently relocated to Thailand indefinitely. In the US, paying by credit card is natural. But that’s not the case here at all.
And that’s where a lot of growth potential lies.
The wonderful thing is that there’s really only a few major global players in this industry, and my personal favorite is Visa Inc. (V).
Visa Inc. is a global payments processing technology company, connecting consumers, businesses, banks, and governments in more than 200 countries by allowing them to use digital currency rather than cash and checks.
An aspect of Visa that a lot of people may not be aware of is that they’re the world’s largest such payments processing technology company. And they’re the largest by a landslide.
For instance, Visa processed 148.5 billion transactions in calendar year 2015. That compares to just 69.5 billion transactions for Mastercard Inc. (MA), and 7.4 billion for American Express Company (AXP). That kind of scale and scope is pretty hard to ignore.
So what you’ve got is a dominant company that provides a ubiquitous service. That bodes very well for shareholders.
Visa primarily generates its revenue via credit and debt card fees, data processing fees, and international transaction fees.
Now think about that.
Every time you buy something and use your Visa card to pay for the transaction, Visa collects fees based on the number of transactions they process, as well as the gross dollar value of the transactions.
So there are just over 3 billion Visa cards in circulation right now. That means billions of cards are being used to pay for transactions, generating revenue via the fees Visa collects.
Buy your groceries with your Visa card? Cha-ching. Swipe your Visa card at the gas station? Pay for the stuff you buy online using your Visa card? You guessed it – cha-ching!
Visa has grown tremendously since going public. I usually like to use 10 years of financial data to smooth out short-term issues and business cycles, but Visa went public in 2008, so their data doesn’t stretch back that far.
Their fiscal year ends September 30.
Between FY 2013 and FY 2017 revenue grew from $11.778 billion to $18.358 billion. That’s a compound annual growth rate of 11.73%, which is just huge.
Earnings per share has grown just as impressively.
EPS has increased from $1.90 to $2.80 over this same time frame, which amounts to a CAGR of 10.18%.
Visa is in a position to grow at least this fast moving forward, at least over the near term. The huge runway for electronic payment growth, the recent acquisition of Visa Europe, and continued share buybacks provide numerous tailwinds to EPS growth.
Indeed, CFRA, a professional analysis firm, is predicting that Visa will compound its EPS at an annual clip 17% over the next three years, which would be a very nice acceleration over what we see above.
Visa doesn’t have the multi-decade dividend growth history that many of the companies I discuss exhibit, and that’s because they haven’t been a public company for that long.
But Visa is not a new company. They’ve been around since the 50s, but it wasn’t until 2008 that normal people could buy equity in this company.
However, I fully expect Visa to continue raising dividends for many years to come, which is a big reason I’m a shareholder in this company.
Visa has been paying an increasing dividend for as long as they’ve been able to.
The company now has nine consecutive years of dividend raises under its belt, which means they’re listed on David Fish’s Dividend Champions, Contender, and Challengers document. Mr. Fish’s resource tracks stocks with at least five consecutive years of dividend raises.
The five-year dividend growth rate stands at 28.4%. Just tremendous.
And the payout ratio is just 27.9%, That leaves a lot of room for continued dividend growth, even at a level that slightly outpaces earnings growth over the next decade or so.
Now, I don’t expect annual dividend raises to remain at that ~30% level indefinitely, but I think shareholders can expect very strong dividend growth – well into the double digits – for the foreseeable future.
The one aspect a lot of dividend growth investors – myself included – don’t like about this stock is the low yield.
Shares yield just 0.71% right now, which doesn’t provide for a lot of current income.
However, I think strong earnings and dividend growth should make up for the lack of current income, meaning there could be significant aggregate dividend income over the long run.
Visa operated for years with no debt, but the recent acquisition of Visa Europe (which only solidifies the business, adds synergy, and improves scale) changed that.
But the balance sheet is still very healthy.
We’re talking a long-term debt/equity ratio of 0.51 and an interest coverage ratio that’s over 21.
And profitability is very impressive.
Visa operates a business that requires very little capital input, so the cash flow is just wonderful. Capital expenditures are very small. Most operating cash flow becomes free cash flow.
Net margin has averaged 41.38% over the last five years, while return on equity averaged 21.14% over the same period.
The margin is incredible. It’s about as good as it gets.
While Visa returns a decent amount of cash back to shareholders via the dividend, a far more substantial amount of the cash they generate gets returned via share buybacks. They’ve repurchased over 20% of the shares outstanding since the IPO in 2008, which is prodigious. And management has been open about remaining aggressive with buying back their own stock.
I mentioned growth earlier, but where is the growth going to come from?
The answer is international markets. It’s amazing how fast Visa is growing considering their size, but the fact is that cashless transactions are much less common in many developing international markets. I noted this earlier.
For instance, international transaction revenue accounted for just $6.3 billion of Visa’s total revenue for FY 2017. That’s well under half of the total revenue for the company.
So you have this very large and successful company that’s generating more than half of their revenue from just one market – the US.
As middle classes rise up in developing countries and their purchasing power increases, cashless transactions will likely increase as well. Cashless is easy, safe, traceable, reliable, and convenient. Once consumers in these international markets realize how easy, safe, and convenient using credit cards is cash will be used less and less.
Of course, it takes time and investment to educate consumers and build out the networks required to facilitate digital currency. But as mobile payments increase in popularity and usage, this allows companies like Visa to grow as well as their networks will be used for these transactions.
While Visa is a great company with a lot of growth potential, there are risks.
Notably, they are subject to regulation and litigation as they operate as a financial technology company. In addition, competition remains fierce in this high-margin industry. They are also subject to technological changes that might be unforeseen right now, specifically in the mobile payments arena.
Shares in Visa are trading hands for a price-to-earnings ratio of 39.19 right now, which is rich. The five-year average P/E ratio for the stock is 32.4. So it’s typically a pretty expensive stock. But it’s perhaps particularly pricey right now. Every basic valuation metric (P/S, P/B, P/CF) is elevated above its respective recent historical average.
I recently valued shares using a two-stage dividend discount model analysis.
I factored in a 10% discount rate. I assumed a 20% dividend growth rate for the first ten years, followed by an 8% long-term dividend growth rate.
This is arguably aggressive, but I think Visa is one of the few companies out there that warrants paying up for. And it frankly wouldn’t be hard at all for Visa to come up with 20% dividend increases for years to come, even if earnings growth falls a bit short. That’s because the payout ratio is so low. And that payout ratio will be moderated by the continued buybacks.
The DDM analysis gives me a fair value of $113.53.
Bottom line: Visa Inc. (V) is a global payments processing juggernaut. Their processing volume is far above the competition, and the growth in cashless transactions abroad and mobile payments here and everywhere should continue to generate rising revenue, profit, and dividends.
As long as people continue to use credit cards and/or digital currency, the odds are very good that Visa will profit and send a good chunk of that profit shareholders’ way.
— Jason Fieber
P.S. As much as I like Visa, its current yield isn’t terribly compelling and the stock isn’t cheap at today’s prices. That said if you’re looking for a high-quality dividend grower that pays more income and is trading at a better valuation, then keep an eye out for this Sunday’s Undervalued Dividend Growth Stock of the Week. The company I’ll be profiling is one of the highest-quality businesses in the world. Not only does the stock appear 21% undervalued at current levels, but you get double the yield (compared to Visa) on top of what will likely be double-digit dividend growth for years to come. Stay tuned for this Sunday’s issue, where I’ll reveal the name, ticker symbol and full analysis on this stock!
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