Visa Stock AnalysisVisa Inc (V) is the world’s largest retail electronic payments network.  Visa provides payment processing services to retailers as well as credit, debit and prepaid payment products.  Visa also has one of the world’s largest global ATM networks which offers cash access in local currencies in more than 200 countries.

It seems more and more people continue get and use credit cards for their daily purchases.  As more people use credit cards, companies such as Visa and Mastercard will benefit.  Recently, for a few different reasons which will be detailed below, I decided to pick up some shares of Visa for my personal portfolio.  For this reason I wanted to take this opportunity to review the dividend growth company for readers.

Dividend Growth and Current Yield

Visa Inc. had their stock IPO (initial public offering) just a few short years ago in 2008.  Since the company’s IPO, they have been growing their dividend payment to shareholders every year.  Visa currently has a 6 year dividend growth streak.

Visa has a dividend rate of $1.60.  At the close of market on Friday July 11th, shares of Visa were selling for $217.00 per share.  This gives Visa stock a current dividend yield of 0.74% (1.60/217).  Many investors may be turned off by the lower dividend yield of Visa.  In fact, for me the current dividend yield doesn’t meet the minimum yield of 2% I usually like to get with my dividend growth investments.  But, as we’ll see later, Visa is a high growth company and I’ve decided that they can be forgiven at the present time for their lower yield.

Visa has a 5 year dividend growth rate of 45.93% compounded annually.  The company’s most recent dividend increase was 40.40%.  Since the company’s IPO, Visa has been growing their dividend rate like gangbusters.

It doesn’t take a genius to see that if the company can keep growing their dividend at such a high rate, the dividend can become quite significant for investors.  Visa has been growing well lately and I believe they have a strong potential for growth at least through the end of the decade which I will hope continues to provide fairly high dividend growth.

Earnings Per Share Growth

Like their dividend growth, Visa has also been doing a great job growing their investor bottom line, EPS (earnings per share).  In 2008, Visa announced earnings per share of $2.25.  Their most recent EPS in 2013 was $7.59.  The company has grown their EPS every year since their IPO.  Visa has a 5 year compound annual earnings per share growth rate of 27.53%.

More recently, Visa has grown EPS from 2012 to 2013 by 22.42%.  As you can see, Visa has been doing a great job growing the company’s earnings for investors.

Net Income Growth

Along with dividend growth and EPS growth, the company has been doing a good job growing their net income.   The company has a 5 year compound annual growth rate of 23.98% for net income.  More recently, they grew net income by 18.49% from 2012 to 2013.

Visa is still considered a growth company.  Much of their growth is contributed to their international division with still room for more growth.

Sales Growth

Like everything else, Visa has also been doing a good job growing revenues.  The 5 year compound annual growth rate of sales is 13.46%.  The most recent year sales growth came in at 13.02%.
In recent years, much of Visa’s revenues have been from their international business.  Visa International accounts for roughly 45% of recent sales revenues for the company.  Also, debit cards play a very large role in bringing in revenue for Visa.  Recently, debit cards account for nearly 57% of Visa revenues.

Outstanding Shares

I like to see a decreasing trend in the amount of shares outstanding.  As company’s buy back and retire shares outstanding, it means that fewer shares are available.  Each remaining share is now worth a larger piece of the profit pie.

Since the IPO in 2008, Visa has decreased shares outstanding by around 16.87%.  Visa appears to be a very shareholder oriented company.  Management has been returning shareholder value through both share repurchases and the large dividend increases.  This is one aspect of the company that makes Visa very appealing to me as an investor.

Net Profit to Long Term Debt

The net profit/long term debt ratio tells me how many years worth of profits it will take to pay off the current long term debt of the company.  I like looking at this metric because it gives me an idea of whether the company has taken on too much debt or not.

Generally I look for this number to be less then 5 meaning if the company used all their earnings over the next 5 years they could wipe out all debt.

The wonderful thing about Visa is that currently they have absolutely zero debt!  The company shows no debt on their balance sheet and is very financially strong.  In fact they are rated very high in company financial strength by many investment analysts.

Dividend Payout Ratio

The dividend payout ratio measures the dividend per share compared to the earnings per share.  How much of a companies earnings per share are they paying out to shareholders in the form of a dividend.

Visa currently has a dividend payout ratio at right around 16%.  The lower payout ratio gives me confidence in the safety of the dividend.  Visa has plenty of room to grow the payout to shareholders and should be able to weather any financial downturn without sacrificing their dividend rate.

Price/Earnings Ratio

The P/E ratio is a metric I look at to determine if a companies current stock price is too high or within reason.  Visa currently has a trailing 12 month P/E ratio of 25.68.

Typically the market P/E average is right around 14 so compared to the market in whole I might determine Visa to be slightly overvalued.  In fact, the higher P/E ratio for Visa is one thing that turned me off about the company.  I am used to investing in companies with P/E’s typically in the 10 to 20 range.

But let’s not forget about the high growth of Visa.  Visa has been growing earnings and dividends at a very high rate since their IPO.  You cannot expect to pay the same valuation for a high growth company such as Visa as you would for the more established slower growing typical dividend growth companies that I’m used to investing in.

When looking over Visa’s historical P/E ratios, they have a historical average P/E ratio since their IPO of 22.02.  Based on this historical average, it would appear that Visa is currently overvalued.

Return Projections

Visa had EPS of $7.59 in 2013.   The past EPS growth rate for Disney has been around 27%.  However, this past year the company only grew at a rate slightly above 22%.

Therefore I am going to use a conservative EPS growth rate of 17.5% over the next 10 years to figure out what 2024 EPS might look like.  This gives me an estimated EPS of $38.07 for Visa in 2024.

If Visa stock is trading at a reasonable P/E ratio compared to their history of 20 in 2024 then it will have a market price of $761.40/share (38.07*20).  This will give me an estimated annual return for Visa of 13.37% over the next 10 years.

If you would be happy earning a 13.37% return over the next few years along with collecting annually increasing dividend payments, then Visa might be an investment worth considering.

This is a very rough exercise based on growth estimates that may not come to reality.  Actual returns in Visa will vary depending on how well the company increases their earnings and how the market values Visa stock in the future.

Recommendation

As I’ve looked more and more into Visa, I’ve become a big fan.  I believe they have a spectacular business with high opportunity for growth worldwide.

Last week, I made my first purchase of Visa stock.  There were a couple reservations I had about purchasing Visa but ultimately I saw more positive in the company than negative.

One reservation I had was the lower dividend rate.  Visa pays a dividend rate less than 1%.  Normally I prefer a company to pay a rate of at a minimum 2%.  I decided to forgive Visa for this because I realized that while Visa may pay a lower dividend currently, they are also growing their dividend at a very high rate.  As long as they maintain this high growth for a few years, the dividend will grow to a substantial payment.

Second, I had concerns about the higher valuation of Visa.  But I was comparing Visa’s valuation to the companies I am typically used to purchasing.  Great dividend growth companies such as McDonald’s, Coca-Cola and Wal-Mart.  They are spectacular companies and you can purchase them for P/E’s in the 15 to 20 range.  Visa is currently over 25.  But here is the deal.  Those companies are in a different stage of their life cycle compared to Visa.  They have already gone through their high growth phase.  Now they are in the more consistent steady profit generating stage.  Visa is still in the high growth stage.  You can’t expect to pay the same valuation for a company that is growing profits at a consistently higher rate.

When I calculated out my future estimated returns for Visa, I realized I would be very pleased with a plus 13% annual return.  And I am pretty confident in this estimate as I was conservative in both my earnings growth and future P/E estimates.  Therefore, I decided to again forgive Visa for their higher P/E ratio.

At current prices, I personally would be OK purchasing shares of Visa (I put my money where my mouth is with a purchase last week).  However, I wouldn’t pay much more than current valuation.  In my opinion they are at the high end of the range I would be willing to buy in at.  I would love to get my hands on more Visa shares.  In the future, I will probably make purchases whenever I have money available  and when valuation is at the current level or lower.

In my opinion, Visa is a great company.  I made a buy last week based on my analysis similar to the one above.  I like the high growth.  I like the future prospects of the company.  I like the investor friendly policies of high dividend growth and share buybacks.

Do you have an opinion on Visa?  Please share your thoughts in the comments below!

Disclosure:  I own shares of V.

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9 Responses to Visa Dividend Stock Analysis

  1. I really like V and they have a long runway for growth internationally. I’m curious how they’ll deal with getting profits back to the US though similar to the situation AAPL was in a year or so ago when they had all that cash overseas and decided to sell bonds to “repatriate” those funds. Huge international market. For the DG investor you just need to realize that even though the yield is small to start off all of the DG stalwarts were the same way. JNJ typically had yields in the 1-1.5% range just 15 years ago. That would exclude them from a lot of investors’ portfolios. I’m glad I got some V sub $180 but I should have added more. I’m hoping to add some below $200 but will realistically add some in the low $200′s.

  2. Charlie says:

    Visa does seem to be a good company, but how about Amex (AXP) and MasterCard (MA). Both have 5 year and 1 year total returns above V. AXP pays a dividend of about 1% and MA of .5%. The P/E ratio of AXP is about 16 and MA is 21. I’m leaning toward MA rather than V.

    Thanks for the direction to this group of companies!

  3. Dan,

    Good stuff! I recently purchased Visa for the same exact reasons. They’re in a great financial position and I think the potential is just huge.

    I wasn’t interested in this stock before because my portfolio wasn’t quite as established. But now that it’s kicking out some serious passive dividend income I felt I could stretch here a bit with V.

    And they’re not really priced all that high compared to some of the blue chips we dividend growth investors typically look at. ADP and CL are both priced higher than V using TTM earnings. And KO is in the same neighborhood with a P/E ratio of 22, compared to 26 for V. The growth potential definitely warrants the valuation, in my opinion.

    I came up with different numbers for their growth rates, which is weird. And I used two different compound growth calculators which yielded the same numbers. Strange.

    Glad to have you on board as a fellow shareholder!

    Best wishes.

    • Dan Mac says:

      Thanks for chiming in Dividend Mantra. I think V will be a good investment over the long term. As for the growth rates you are calculating, where do you pull your data? I pull all my financial data usually from Valueline and then use Excel spreadsheets to calculate my growth rates. I’ll go back to recheck my figures. One thing I did notice (I just checked out your recent buy article) is that we have different EPS #’s for 2009. You have $3.10 where Valueline has $2.92. I’m not really sure the discrepancy. I notice sometimes Valueline’s figures vary from other sources for one reason or another so probably the case here.

      Either way, I think Visa will be a great long term investor. I’d love to pick up more shares and plan on doing so especially if the price were to drop back down a bit. Right now unfortunately I just don’t have the cash available.

  4. Dan,

    Fantastic review/snapshot of the company. Just enough to get a good picture, but not too much to be overwhelming.

    As a newbie to dividend investing do you think Visa is a good place to start? Or should I aim for a stock with a higher payout?

    Patrick

    • Dan Mac says:

      Hi Patrick-

      Thanks for the question. When I just started out in dividend growth investing, I aimed to accumulate companies offering solid starting dividend yields (roughly in the 2.5 – 5% range). I built my portfolios foundation on companies like Wal-Mart, McDonald’s, Coca-Cola, Chevron, Altria, AT&T and others. Now that I’ve got a pretty good foundation going, I’m more willing to take a chance on a lower yielding but higher growth company like Visa. However, the traditional dividend growth stocks that you read about will remain the cornerstones of my portfolio. Visa and similar high grow low yielders will be just a small part of my overall strategy.

  5. Andrius says:

    Hello,

    Thank You for Analysis on Visa.

    I added it to my watchlist, but I’m not happy with increasing number of diluted shares and P/FCF (TTM) ratio being above my target.

    I haven’t dug deeper regarding number of shares, however Reuters data shows that during last quarters it increased :(

  6. Yeah, Visa is one of the positions that I want to accumulate a major stake in. I expect to buy it for a holding period of 40+ years(effectively for the rest on my life).

    I have had a lot of unexpected expenses lately and have to wait a while until I can really invest anything of note, but this should be my next holding added to my Roth IRA.

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