- Visa has handsomely beaten S&P 500 since its formation in 2008, returning more than 400% to shareholders.
- Transition towards cashless payments will be a strong tailwind for Visa as it enjoys huge market share in card payments market
- High Growth, Strong Profit And Low Risk Makes Visa Stock A Buy?
There are few companies which have rewarded shareholders over the past several years like Visa has done. Since its inception, just before the peak of the financial crisis, Visa stock has returned 400% to shareholders compared to 53% gain in S&P 500 (excluding dividends). And it is likely to continue generating this kind of return for investors in the coming years. What makes Visa stock even more appealing to investors is the low level of risk that this stock carries. Visa stock has a beta of 0.82, better than most of the defensive stocks.
Visa enjoys a duopoly in the debit card payment market along with Mastercard. While its market share has declined from 80% in 2005, it still enjoyed 70% market share in 2015. This is a huge advantage for Visa. Visa also enjoys a huge market share in credit cards. In the credit cards segment, Visa has around 47.4% market share, up from 43.4% in 2010, with American Express coming a distant second at 25.4%.
To add to this, Visa, in partnership with Citibank, has replaced American Express as Costco’s co-branded card partner, adding more than 7 million credit cards to its portfolio. Last year Costco had announced that it is walking away from its sixteen-year exclusive Co-branded card partnership with American Express as it got a better deal from Visa and Citibank.
The new Citigroup backed Visa has much better reward points for customers. On their American Express cards, Costco customers received 3% cash back on the purchase of gasoline of up to $4000 per year. With the new Visa card, which will come into operation on June 20th, Customers will get a 4% cashback on fuel purchases up to $7000 per year. The cash back has gone up by 1% in several categories, richly rewarding customers. Visa hopes to increase average spending per customer. Currently, average spending per customer per year on Visa cards stands at $4075, compared to $12,517 on American Express cards.
The company has seen strong growth over the last five years with its revenue growing at an 11% CAGR. What’s more impressive is that it has managed to grow its profits at an even faster rate. Its operating profit grew at 14% CAGR over the last five years while EPS grew at a CAGR of 18% over the last 5 years.
The ongoing transition towards cashless transactions will act as a strong tailwind for Visa’s growth. Cash is still the king when it comes to transactions and payments. According to a study by Mastercard, cash still accounts for 85% of the global transactions. In Netherlands, world’s most cashless country, cash still accounts for 40% of the overall consumer transactions. The share of cash is much higher in developing countries such as India, sometimes more than 90%.
However, the governments around the world have started pushing towards cashless payments, as it reduces cost and helps in tracking illegal money. With a large chunk of the world's population moving towards digital payments, Visa, as the largest card network has a lot to gain. Another growth avenue will be Visa Europe, which Visa Inc acquired for around $21 billion. Visa Europe should give Visa Inc a strong platform for its European operations. Analysts estimate Visa's revenue to grow at over 10% CAGR for the next two years.
Visa has paid a dividend of $0.5 during the last 4 quarters, generating a dividend yield of 0.64% LTM (Last Twelve Months). Average dividend yield over the past five years is around 0.7%. Agreed, Visa may not be yielding dividends as high as CocaCola or IBM, but it has seen a strong dividend growth of over 30% over the last five years and is likely to continue growing at a similar pace in the coming years for a couple of reasons. Firstly, Visa is expected to grow its EPS at 16.6% over the next five years. This will provide Visa with an ability to continue its dividend growth. Secondly, Visa only pays one fifth of it as dividends. Visa’s dividend payout ratio stands at 18%. In the case of a slow down in growth, Visa will still have a lot of room to increase its dividends.
Visa Stock has been one of the best performers in the last five years with strong growth, solid profit margin and high return to shareholders. And with a beta of 0.82, it brings stability and lower risk. Visa continues to enjoy strong tailwinds from the transition to digital payments and acquisition of Visa Europe. Visa stock currently enjoys a strong buy rating from wall street, which is also in line with our Visa stock analysis.