Visa (NYSE:V) is a credit card processing company, and the services company is a buy for the long-term total return investor. Visa is growing steadily and has plenty of cash, which it uses to increase the dividend each year and buy back shares. Visa is a payments company that connects consumers, merchants, financial institutions, businesses, strategic partners and government entities to electronic payments. The company is more than the credit card brand we know; it also provides money transfer for global commerce. Visa represents 0.40% of The Good Business portfolio; my IRA portfolio of good companies is balanced across all investment styles. I want to increase some of my positions, but all the dividends plus some sales are needed for my RMD.
As I have already said in previous articles.
I use a set of guidelines that I’ve codified over the past few years to review companies in the Good Business Portfolio (my portfolio) and other companies I review. For a full set of guidelines, please see my article “The Good Business Portfolio: Guidelines Update, March 2020”. These guidelines provide me with a balanced portfolio of income, defensive, total return and growth companies that will hopefully keep me ahead of the Dow Jones average.
The method I use to compare companies is to first look at total return relative to the market. If a company can’t beat the market, why do you want to invest in that company? Visa’s excellent total return of 168.96% versus the Dow base of 85.40% over my 74 month test period makes Visa a fantastic investment for the total return investor. Looking back five years, $10,000 invested five years ago would now be worth over $28,100 today. This gain makes Visa a good investment for the hindsight total return investor, who has future growth with increased income as the Covid-19 virus is controlled globally and in the United States. Overall, Visa is a good company with an S&P CFRA 3-year CAGR of 20% expected to grow as the economies of the United States and overseas expand in the future, with growing demand for Visa credit card processing and money transfer services.
Visa is a prudent investment for the income investor who also wants good growth as the global money transfer business grows. Visa has healthy cash flow estimated at $16 billion a year in 2022, and the company is using some of that cash to grow its credit card business, increase dividends each year, and buy back stock; all three increase shareholder value. A quote from CEO Al Kelly’s Q1 earnings call sums up the good expectations about using high cash flow to increase growth and increase shareholder returns.
Amid much uncertainty, this quarter was the result of the ongoing COVID pandemic. Visa’s financial performance has been very strong. Our net revenues increased 24% year over year. Non-GAAP EPS was $1.81, up 27%. And our financial performance was driven by record volumes, transactions and credentials. In the first quarter, we passed the $60 billion mark in payment transactions for the first time in history, up 26% from two years ago. Visa cards were used 28 million times per hour in the last quarter. And we also grew our card credentials to over 3.8 billion, up 10% year-on-year. Looking ahead, we expect accelerated revenue growth relative to pre-COVID over the next several years, driven by our three strategic levers of consumer payments, new flows and value-added services. Many current payment trends, including A2A, RTP, Buy Now, Pay Later, crypto and wallets, are enabling new ways to pay. These represent opportunities for Visa, where we are uniquely positioned to use our unique strength and global network to help them grow and evolve. When we look at the opportunity ahead, if you assume that global cash is growing at 1% per year, industry-wide personal consumer spending digital penetration has been at 90% for several decades. For example, in Latin America, until a few quarters ago, the volume of cash was higher than the volume of payments on Visa IDs. In fact, over the past year, there has been a change of almost 6.5 points and payment volume now accounts for 55% of total volume, even though liquidity in Latin America increased by 10% in course of the last trimester.
This shows the sentiments of the CEO and the fundamentals for the continued growth of the Visa business and shareholder return. Visa has good long-term growth and will continue as the global workforce returns after the COVID virus is further contained, which will grow global economies.
One of the minor reasons to own Visa is to have stable quarterly income with good growth as vaccines control COVID virus, and people go back to work and can spend more. Visa has a below-average dividend yield of 0.7% and has seen increases for 13 years, making Visa a good choice for the dividend-growing investor who wants consistently growing income. The dividend was last increased in October 2021 for an increase from $0.32/quarter to $0.375/quarter or a 17% increase. The five-year average payout ratio is low at 22%, allowing cash to be retained to grow the business by adding new accounts, increasing the dividend and repurchasing shares which increase earnings, bringing shareholder value. The chart below shows cash flow for the quarter ending December 2021 compared to 2020.
Visa is a large-cap company with a capitalization of $475 billion, well above my target of at least $10 billion. Visa’s 2022 projected cash flow of $16 billion is excellent, providing the company with the means to grow the business, increase dividends and repurchase stock. Visa’s S&P CFRA rating is four stars or buy with a one-year target price of $270, exceeding my guideline of having at least three stars. Visa is currently below target price by 27% and has a high PE of 32, making Visa a long-term buy at this entry point considering the solid growing cash flow driving the dividend increases and share buybacks. With a CAGR of 20%, VISA’s projected growth is a buy; good growing companies don’t come cheap.
I aim for earnings from my positions to consistently beat their quarterly estimates. For the last quarter, on January 27, 2022, Visa reported earnings that beat expectations at $1.83 by $0.13, compared to last year at $1.42. Total revenue was higher at $7.06 billion than a year ago, 21.2% year-over-year and exceeded forecast total revenue of $266 million of dollars. This was a good report with expected results, turnover increasing compared to last year and expected results. The next earnings report, Q2, will be released in April 2021 and is expected to be $1.66 from the prior year at $1.38, a good increase. The chart below provides a summary of Q1 results and growth drivers for Q1 2022.
The Good Business Portfolio likes to embrace all sorts of investment styles, but focuses on buying businesses that can be understood, make a fair profit, reinvest profits back into the business, and also generate a good stream of income. Above all, what makes Visa attractive is the reasonable future growth rate of its business. More and more retail purchases are made using credit cards online and in stores, increasing demand for the VISA brand worldwide. The company cannot lose 18% – 26% on credit card balances.
Risks and disadvantages of the business
The obvious risk for Visa is that another mutation of the Covid virus will not be controlled by the vaccines and cures used today, and we have another downturn until a new vaccine is developed. Visa has great global services, and they keep adding businesses to their sales, but the business they’re in is competitive, so they have to keep up with the competition by providing faster and better service. There’s also always the risk that government regulation will try to take a chunk out of businesses’ large cash flow or reduce the maximum rates the business can charge its credit card customers. Also, at the moment we have the suspension of services with Russia and we don’t know how long this will last.
Visa is an excellent investment choice for the total return growth investor with its well above average total return. The Good Business Portfolio has started a small 0.40% position in the portfolio, and I intend to add to the position when cash becomes available. If you want a stable, growing, good total return in a growing financial services business, Visa is the right investment for you, and is priced well below target with a possible gain of 27% over one year.
With two months in the year, the Good Business portfolio’s total return is 3% below the Dow average from 01/01/2022 to March 18, but that’s just two months with ten more to come. during this year. Every quarter after earnings season ends, I write an article giving a full list of the portfolio and performance. The last article is titled “The Good Business Portfolio: 2021 3rd Quarter Earnings and Performance Review”.