This is the first of the dividend stock article series, where You have the power to decide. The dividend-paying company that gets the most votes on my Instagram poll is the one I will write an article about. The first requested dividend stock article is about Visa(V).
The article is around 1500 words, which should take you around 5 minutes to read.
If you prefer to watch the analysis on video, I have put together a video on Youtube for you. If you want to see more video content from me, please like the video and subscribe to the Dividend Athlete channel on Youtube.
The Company
Visa(V) Inc. is a global payment service company that helps consumers, business, banks and governments to make and accept digital payments. The company does business in over 200 countries, making it a truly global company. It is a brand that is known and trusted around the world. Revenues and cash flows have grown at a very impressive pace as the company has benefited from the tailwind of cashless payments. Visa’s advantage comes from its vast network. As more and more people have Visa cards, more businesses will want to set up a payment system that services those cards.
Revenue has grown at a CAGR pace of 11.5% over the last decade. Free cash flow at a very impressive 17% CAGR over the same period.
As the company has reduced the share count through buybacks, the per share growth has been even more impressive. The company has reduced the amount of shares outstanding by -2.7% per year over the last 10 years. Combining the share reduction and free cash flow growth, the per share FCF growth has been a whopping 22% per year on average.
No surprise that Visa is the first requested dividend stock article, this type of growth attracts investors.
Let’s have a look how this company generates revenue
As we can see, Visa makes money largely in 3 segments:
- Service – Revenue made from services provided to card issuers for the use of Visa products.
- Data Processing – A small fee collected by Visa on every transaction for access and maintenance for its payment network.
- International Transactions – Revenue from international payments and exchanging currencies. Using your card when on holiday abroad for example.
Think of Visa as being a toll collector. Every time somebody makes a payment using the Visa network, the company collects a small fee on that.
This should give the followers, who requested Visa as the first requested dividend stock article, an understanding of how this company generates revenues.
Profitability
This company is extremely profitable and is generating a lot of free cash flow per every $ of revenue made.
Below I used 10-yr average figures to run Visa through my profitability criteria I use.
Return on Equity = 22%(my criteria is >12%)
Return on Invested Capital = 17% (my criteria is >12%)
FCF/Sales = 42% (my criteria is >5%)
Those extremely high figures further show the quality of the business.
I am especially impressed by the FCF/Sales. It shows how much of every $ of revenue gets turned into free cash flow. In Visa’s case they are able to have excess cash (on average) of $42 cents from every $1 on the top line.
Balance Sheet
If you want to analyse balance sheets yourself, I suggest looking at the video I made here. It explains the ratios that we use for today’s analysis in easy to understand terms.
Visa has a very strong balance sheet. Not only does it have a ton of cash, but the debt load is easily manageable. This is evident when I run it by the 3 ratios I use in my Investing Checklist.
Debt/Equity – 0.47 ( my criteria <0.5)
Debt/EBITDA – 1.09 (my criteria <3)
Interest Coverage – 33.4x (my criteria >8x)
Dividend
The dividend is the reason that I haven’t considered Visa for my personal portfolio.
Visa’s dividend at the time of writing yields 0.65%. It has grown at rapid rate of almost 24% per year over the last 10 years. This has lifted the dividend per share from $0.13 to $1.1.
The dividend is very safely covered. The dividend payment makes up only 22% of Visa’s 2019 free cash flow.
However, the yield is simply too low for me. As a result of the share price appreciating, the yield has been surpressed. At a yield of 0.65%, it doesn’t offer enough income to achieve my personal investing goal.
Orange line represents a 3% yielding stock growing its dividend at 7% per year.
Blue line is Visa’s current dividend yield growing at its historical pace of 24% per year.
I assume all dividends are re-invested.
Even when Visa’s dividend manages to grow at such a high pace for a long period (which is unlikely), it takes the starting 0.65% yield 15 years to catch up with the higher 3% yield growing at 8% per year.
Even if Visa’s dividend keeps growing rapidly, it still won’t help with my personal investing goal – retiring in 2026 on dividend income.
Visa stock would offer me a <2% yield on my investment in 2026 when accounting for the expected high growth. Comparing that to a >5% yield on cost from a 3% yielder growing at 8% per year, I choose the higher yield.
Valuation
As it is no secret that Visa is a fast-growing company, the valuation has historically been high. Investors expect big things from this business and are willing to pay more per $ of earnings or free cash flow as a result. The 5-yr average P/E has been 33 and P/FCF 32. Whilst the stock dropped alongside the market due to the coronavirus pandemic, it never reached “bargain” valuations. Currently, after the market has rallied again, the P/E stands at 33 and P/FCF at 32. As we can see it’s pretty much in-line with the company’s 5-yr average. The cyclically adjusted PE (CAPE) is an extremely high 65.
Fast-growing companies usually demand a higher valuation multiple, as investors are expecting earnings and cash flows to keep growing. It is normal. However when investing in this type of fast-growing company, the business needs to keep growing to justify the valuation. If the growth were to slow down, investors would not be willing to pay the same multiple anymore. This is valuation risk.
Risks
We already discussed valuation risk in the previous paragraph. If the expected growth doesn’t materialise – the investors who bought a high valuations get punished.
Coronavirus also poses risks to Visa, as less transactions are made when businesses are shut. This means lower revenues for Visa. However, I expect this to be a short-term issue as economies globally are starting to open back up for business.
Visa has a strong position in the industry. It’s payment network is only rivaled by MasterCard(MA).
As with any profitable industry, it attracts competition. Fintech companies are working on providing alternative solutions for payments. Visa is combating this by making use of its cash to acquire smaller companies and incorporating them into their business. The latest acquisition was a $5.3 billion deal for Plaid. Plaid helps people connect their financial accounts to the financial apps they use.
Requested Dividend Stock Summary
Visa is a high-quality business. Its wide moat allows Visa to be extremely profitable and generate a lot of free cash flow. A strong position in the industry means that Visa will further benefit from the tailwinds of cashless payments. The company is using a part of its generated cash to reward shareholders through fast-growing dividends and reducing the share count through buybacks. Investors have also been rewarded through capital appreciation, that has been a result of Visa’s earnings growth and investors willingness to pay a high multiple for it.
Often people don’t understand my meaning when I say that everyone should invest in accordance with their goals. Visa is a great example of a fantastic business, but it’s not an investment that suits me.
This company doesn’t fit my investment plan due to my personal goal of high dividend income in less then a decade. Visa is likely to keep growing as a business, but it doesn’t help me closer to my goal.
I hope you all enjoyed the very first Requested Dividend Stock Article on Visa. Let me know in the comments below, if you have any questions. If you would like to have a say on the next dividend stock article, follow me on Instagram and participate in the polls.
Disclaimer: This is NOT an investing recommendation. You can lose your invested capital. I am not a financial professional of any kind. The article published should NOT be considered to be investing recommendation or basis for financial planning. Before making any investing or financial decisions, contact an appropriate professional. All content on this website is for entertainment purposes only.
